Fiscal Monetary Policy Research Articles

Active or passive? Revisiting the role of fiscal policy during high inflation

We investigate the interplay of the monetary–fiscal policy mix during times of crisis by drawing insights from the Great Inflation of the 1960s and 1970s. We use a Sequential Monte Carlo (SMC) algorithm to estimate a DSGE model with three distinct monetary/fiscal policy regimes. We show that, in such a model, SMC outperforms standard sampling algorithms because it is better suited to deal with multimodal posteriors, an outcome that is highly likely in a DSGE model with monetary–fiscal policy interactions. From the estimation with SMC, a differentiated perspective results: pre-Volcker macroeconomic dynamics were similarly driven by passive monetary/passive fiscal policy and fiscal dominance. We apply these insights to study the post-pandemic inflation period.

Monetary-fiscal policies design and financial shocks in currency unions

This paper analyzes the design of monetary and fiscal policies in a currency union by focusing on the capacity to react to symmetric and asymmetric financial shocks. The model is constructed in order to mimic the institutional design adopted for the policy making in the EMU. The paper shows how a currency union set-up like the one adopted by the EMU can easily cope with symmetric financial shocks. However, it shows how in the face of asymmetric shocks more space for fiscal interventions is crucial, especially in more peripheral member countries.

Made in Europe: Monetary–Fiscal policy mix with financial frictions

We study the role of fiscal and monetary policies in a financially constrained economy. An active monetary–passive fiscal regime amplifies technology shocks, mitigates preference shocks, and neutralizes the expansionary effects of fiscal shocks through “debt deflation” and “real interest rate” channels, compared to an active fiscal–passive monetary policy regime. Several features of the data suggest that in the aftermath of the 2007 Financial crisis, the monetary policy in the United States was more dovish than in the Euro Area while fiscal policy seemed less concerned about the dynamics of sovereign debt, implying that the distinct post-crisis dynamics of the United States and the Euro area can be rationalized through different fiscal and monetary policy mixes.

Understanding the role of China's factors in international commodity price fluctuations: A perspective of monetary-fiscal policy interaction

This paper examines the role of China's factors in international commodity price fluctuations from a perspective of monetary-fiscal policy interaction. We employ a nonlinear Interacted-VAR model to investigate whether the impact of China's monetary policy shocks on international commodity prices is conditional on its fiscal policy stances. Using several measures of China's fiscal policy stance, we estimate their interaction with monetary policy identified through Interacted-VAR analysis. We find that the response of international commodity prices to China's monetary policy is much stronger and more persistent in the presence of its active fiscal policy stance. The empirical findings are very consistent when using several alternative model specifications. Moreover, our analysis suggests that failing to take into account the interaction of monetary-fiscal policies in the model might lead to incorrectly assessing the impact of monetary policy on commodity price fluctuations. In addition, our results reveal the substantial heterogeneity in the impact of China's factors on commodity prices across sectors. These empirical findings offer insights into the interaction of monetary-fiscal policies, as well as the role of China's factors in the international commodity markets.

Persistent Inflation and Financial Instability. A study on John Cochrane's Fiscal Monetary Policy Models

Persistent Inflation and Financial Instability. A study on John Cochrane's Fiscal Monetary Policy Models

Examining the Effects of Fiscal-Monetary Policy Interactions on Unemployment Rates in Nigeria (1985-2023)

Examining the Effects of Fiscal-Monetary Policy Interactions on Unemployment Rates in Nigeria (1985-2023)

Monetary-Fiscal Policy Interactions When Price Stability Occasionally Takes a Back Seat

Monetary-Fiscal Policy Interactions When Price Stability Occasionally Takes a Back Seat

Rare Disaster, Liquidity Provision, and Monetary-Fiscal Policy Choices

Rare Disaster, Liquidity Provision, and Monetary-Fiscal Policy Choices

Monetary-Fiscal Policy Mix and Stock Market Performance in Nigeria: The Role of Quality of Governance and Political Stability

Monetary-Fiscal Policy Mix and Stock Market Performance in Nigeria: The Role of Quality of Governance and Political Stability

Monetary-fiscal policy relations in the euro area: The impact on the primary balance

With this paper, our objective is to empirically study public debt sustainability by estimating a fiscal reaction function where the primary balance relative to GDP is assumed to be a function of the public debt to GDP ratio of the previous year and of other macroeconomic variables. In particular, we take into account the effects of the lagged real long term interest rate and of the lagged inflation rate on the primary budget of the governments to account for monetary policy influences. We resort to the fixed effects and to the random effects models for a panel of 12 euro area economies from 1996 to 2020. We find statistical evidence for sustainable debt policies and detect that both monetary policy variables are positively correlated with the primary balance to GDP ratio. This holds both for the fixed and for the random effects estimation, when those variables are included simultaneously.

Discussions on the Growth Efficiency of Expansionary FiscalPolicy via Monetary Policy in ShrinkingPeriods:Wide Range of Country Analysis

There are many different opinions in the literature that expansionary fiscal policies can be effective on growth during periods of economic contraction. In this study, different approaches to expansionary fiscal policies are examined in terms of the effects and tradeoffsbetween fiscal expenditures-growth, expansionary tax policies-growth and inflation-growth. The short-term and long-term effects of fiscal policies on growth in 110 countries for the period of 2007-2016 were analyzed, taking into account the expansionary policies of the 2007-2009 period, the effect of the main growth dynamics and the interaction of monetary-fiscal policies. The results show the holistic view and effectiveness.

The Eurozone’s influence on the cyclical macroeconomic performance: comparative analysis of Slovenia and Croatia

This paper analyses the impact of cyclical external shocks on the macroeconomic performance of Eurozone and EU member countries. The latter is achieved through a comparative study of two EU countries, Slovenia and Croatia, of which only the former is a Eurozone member state. Cross-country differences are observed over the 2000-2018 period, thus covering all stages of the economic cycle. The primary hypothesis is that the Eurozone economic integration provides its members with comparably greater macroeconomic stability and balanced growth rates. The research elaborates on the possibilities and effects of more autonomous macroeconomic adjustments tailored to the specific needs of non-Eurozone EU countries. Methodologically, the study exhibits an intricate nexus among theoretical, empirical, and institutional economics and shows that the impact of the country’s international interconnectedness, stemming from the economic and geographical links, bears greater importance than Eurozone membership. Concurrently, this analysis confirms that whether the Eurozone’s benefits outweigh the shortcoming of monetary sovereignty abnegation depends predominantly on the capabilities of individual countries and Eurozone’s institutions to design and execute an effective monetary-fiscal policy mix.

Government expenditure and inflation (Empirical study using Granger causality in Indonesia 2000-2021)

A Government expenditure is one of important things in determine the economic performance of the country, but when it comes to increasing the economic growth, it can cause inflation. The high inflation rate will impact in economics of the nation as a whole. This study aims to investigate the casual relationship between government expenditure and inflation rate in Indonesia during 2000-2021 period. Time series data obtained from the official website of Central Bureau of Statistics of Indonesia and the Finance Ministry of Indonesia is analyzed using Granger Causality Test. The result show that the variables are stationery and have long run relationship. However, they only have one-way relationship in which government expenditure cause inflation rate but inflation rate doesn’t cause government expenditure in Indonesia. We suggest appropriate fiscal-monetary policy mix, redirecting government expenditure to productive sector and maintained strategic in controlling inflation rate.

Energy price shocks and stabilization policies in the MATRIX model

The recent surge in energy prices in Europe has prompted governments to introduce policy measures to support households and businesses. This paper uses the MATRIX model, a multi-sector and multi-agent macroeconomic model calibrated on the Euro Area, to analyse the economic and distributional effects of different macro-stabilization policies in response to energy price shocks. We find that, without policies, a surge in fossil fuel prices leads to higher inflation, lower GDP, and slow recovery. Generalized tax cuts and household subsidies have no significant effects, while firm subsidies promote a faster recovery at the expense of financial instability in the medium term, leading to a second slump. However, this second-round effect can be mitigated with proper fiscal-monetary policy coordination. If timely adopted, a government-funded energy tariff reduction is the most effective policy in mitigating GDP losses at relatively low public costs, particularly when coupled with an extra-profit tax on energy firms. Energy entrepreneurs benefit from rising fuel prices in all scenarios, but workers and downstream firms’ owners benefit more from energy tariff cuts and windfall profits tax.

통화정책 체제를 고려한 재정승수 효과의 실증분석

통화정책 체제를 고려한 재정승수 효과의 실증분석

Fiscal multipliers and structural economic characteristics: Evidence from countries in sub‐Saharan Africa

AbstractOutput response to discretionary fiscal policy is a key aspect of examining various theories, findings of empirical studies and delivering guidance to policymakers. This study analyses the output response to unanticipated fiscal spending shocks under several structural economic characteristic factors, including business cycle states, debt burden, openness of the economy, exchange rate regimes and political governance regime, using annual data from 40 countries in SSA spanning from 2000 to 2019 in a panel threshold vector auto‐regression model. The findings indicate that fiscal spending multipliers have much larger effects on output in times of recession, in economies operating under lower trade openness, a fixed exchange rate, low‐debt burden, restricted capital mobility, less financial development and a democratic governance regime. Based on the results, the discretionary countercyclical fiscal policy and optimal fiscal policy action are recommended. Moreover, in order to have effective fiscal policy must target hand‐to‐mouth consumers (non‐Ricardian consumers) and firms with limited liquidity, concentrating on social services and social protection to increase short‐term demand. Likewise, A proper fiscal monetary policy mix should be considered with other structural measures to maximising the positive effects of the fiscal expansion.

Are Banks Too Many? A Theoretical Possibility and a Policy Issue

<p><big>Motivated by the Blackorby-Schworm (1993) observation that market outcomes may differ from those originating in market-actor optimization, this paper claims that the number of banks in the market is larger than the number justified by bank profit maximization alone or in combination with bank depositor welfare maximization. This claim is made within the context of bilateral monopoly banks and intertemporal utility maximization by bank depositors. The basic policy implication towards bank population rationalization is a minimization of the deviation away from the optimal interest rate margin at every stage of the business cycle. It is meant to be an acyclical policy though the target of optimal bank population is attainable by active countercyclical policy as well. The nature of this policy issue makes the use of macroprudential measures imperative, jointly perhaps with a fiscal-monetary policy mix. A dynamic version of the model in a Cournot environment is akin to the modeling of Minsky's hypothesis of financial fragility.</big></p>

MODELLING THE IMPACT OF EXCHANGE RATE VOLATILITY ON TRADE FLOWS IN NIGERIA

This study investigates the impact of the persistent exchange rate volatility on trade flows in Nigeria, for the period of 1970-2021, using secondary data obtained from various sources. Data were analyzed using descriptive tools like tables, graphs and other econometric methods, such as the Two Stage Least Squares method. Result of the trade flows equation indicates that though all the explanatory variables conformed to theoretical a priori expectation, none was statistically significant at 5% level. It confirms a negative and insignificant impact of exchange rate volatility on trade flows in Nigeria. Further findings from the EGARCH model indicate that exchange rate volatility in Nigeria has been high, persistent and asymmetric with positive leverage and high clustering effect over the study period. The study recommends pragmatic economic diversification away from oil to the tradable lagging sectors of agriculture, manufacturing and the services sector, in order to stabilize the long run value of the exchange rate. Also, appropriate monetary-fiscal policy measures should be adopted in order to reduce exchange rate volatility, particularly the supply-sided approach. Nigeria should also increasingly open up her economy to foreign trade in order to harness foreign direct investment inflow into the economy.

The Impact of Fiscal-Monetary Policy Interaction on the Indonesian Economy

This study seeks to examine the interactions between fiscal and monetary policies and their impact on output and inflation in Indonesia from 2003:4 to 2018:4 using Structural Vector Autoregression (SVAR). It is important to investigate the coordination between both because overall macroeconomic policy framework requires a close coordination between monetary and financial policies. The variables utilized are government spending, debt, output gap, tax, inflation, interest rate, and exchange rate obtained from the Indonesian Ministry of Finance, the Indonesian Statistics, and Bank of Indonesia. Government spending as a proxy for fiscal policy and interest rate as a proxy for monetary policy have a strategic complement relationship, whereas tax revenue as a proxy for fiscal policy and interest rate as a proxy for monetary policy have a strategic substitutes relationship.

Deleveraging Backed by Fiscal Support: The Monetary–Fiscal Policy Mix during the Deleveraging Campaign in China

Deleveraging Backed by Fiscal Support: The Monetary–Fiscal Policy Mix during the Deleveraging Campaign in China