Fiscal Policy Interactions Research Articles

The Implication of Monetary and Fiscal Policy Interactions for the Price Levels: the Fiscal Theory of the Price Level Revisited

This paper aims to contribute to the empirical literature on the interaction between monetary and fiscal policy. We consider the impact of monetary and fiscal policy shocks on inflation and output dynamics using a Time-Varying Parameter Factor-Augmented VAR (TVP-FAVAR). In baseline results from a linear model, including fiscal policy in the factors has implications for the impact of monetary policy shocks on inflation. This can be explained with the generated positive wealth effects. Moreover, results from our TVPFAVAR indicate that price puzzles from monetary policy shocks are more accentuated during particular regimes. For example, under coordination of Fiscal-Active with Monetary-Passive policy during the Burns and Volcker regime of 1970s and 1980s inflation rise in response to a contractionary monetary policy shock. Likewise the baseline model, the underlying mechanism can be explained through the wealth effect channel. Finally, the results of a fiscal expansionary policy provide support for the non-Ricardian view on fiscal policy within both the linear and non-linear FAVAR model.

Policy Regimes, Policy Shifts, and U.S. Business Cycles

Abstract Using an estimated DSGE model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period. This gave rise to self-fulfilling beliefs and unconventional transmission mechanisms of policy shifts: unanticipated increases in interest rates increased inflation and output, while unanticipated increases in lump-sum taxes decreased inflation and output. We show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 25% and the rise of inflation in the 1970s would not have occurred.

Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy

This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.

Commitment versus discretion in a political economy model of fiscal and monetary policy interaction

Does price commitment result in lower welfare? I pair an independent monetary authority controlling nominal bonds with a fiscal authority microfounded by the political economy model of Battaglini and Coate (2008). Without price commitment, time inconsistency is alleviated by interaction between the benevolent monetary authority and the politically distorted fiscal authority. With price commitment, nominal bonds will be used for wasteful spending by the politically distorted fiscal authority. Price commitment results in lower welfare because it eliminates monetary control over fiscal decisions.

Equilibria under monetary and fiscal policy interactions in a portfolio choice model

This paper studies how the presence of income-taxes changes the properties of general equilibrium models with monetary and fiscal policy interactions. It is found that from a global perspective, the only policy regime that leads to a unique equilibrium is one where fiscal policy is active, i.e. the fiscal theory of the price level regime in Sims (1994). From a local perspective, there are three regimes. In particular, and relative to the previous literature following Leeper (1991), a new third regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. To obtain the size of the new regime, the paper characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state. In the new regime, monetary and fiscal backstops are brought into play so as to rule out off equilibrium dynamics, and inflation can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981).

Indonesia Macro Economy Stability Pattern Prediction (Mundell-Flamming Model)

This study examines whether economic stability in Indonesia capable predicted by the model Mundell-Fleming. Prediction proxy stability of the interaction of fiscal and monetary policy. During Indonesia's economic stability is largely determined by the strength of economic fundamentals, while economic fundamentals are strongly influenced by fiscal and monetary policies. Therefore flemming Mundell predicts how strong the economic stability in Indonesia ?, the statement in the analysis by using a long-term predictions are Vector Autoregression. Research findings indicate patterns of interaction predictions variety of fiscal and monetary policy, both short term, medium term and long term. It turned out that fiscal policies are derived from taxes are more effective than government spending to control economic growth, investment and inflation, but government spending is more effective to control the exchange rate. The monetary policy of interest rates more effectively control the exchange rate and inflation, while the money supply is more effective in controlling the growth of economy and investment. Keyword:Mundell-Fleming, Macroeconomic Stability, Fiscal Policy, Monetary Policy.

Monetary and fiscal policy interactions in a post Keynesian open-economy model

ABSTRACTUsing a post Keynesian model, this study aims to analyze the stabilizing role of fiscal and monetary policies in an open economy with a managed exchange rate regime. The real exchange rate is modeled as an endogenous variable and inflation explained using the conflicting claims approach. The dynamic properties of macroeconomic equilibrium are evaluated in different regimes of fiscal and monetary policies. The main result of this study suggests that the preferred policy regime is the one in which economic authorities are complementary and fiscal policy plays an explicitly active role. In this regime, the fiscal policy must commit to the target for the rate of capacity utilization and the monetary authority must commit to the inflation target.

Bond Convenience Yields and Exchange Rate Dynamics

This paper proposes a new explanation for the failure of Uncovered Interest Parity (UIP) that rationalizes both the classic UIP puzzle and the evidence that the puzzle reverses direction at longer horizons. In the model, excess currency returns arise as compensation for endogenous fluctuations in bond convenience yield differentials. Due to the interaction of monetary and fiscal policy, the impulse response of the equilibrium convenience yield is nonmonotonic, which generates the reversal of the puzzle. The calibrated model fits exchange rate dynamics very well. I also find direct evidence linking convenience yields to excess currency returns. (JEL E43, E52, F31, F41, H63)

Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries

We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary–fiscal narrative for Germany, the U.S., and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of non-responsible fiscal policy and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary–fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.

Monetary and Fiscal Policy Interaction in the Greece: A Cointegration Approach

Monetary and Fiscal Policy Interaction in the Greece: A Cointegration Approach

Macroeconomic policy coordination and British labour market: is the state contingent forward guidance dancing a tango solo?

This study has added a new perspective to the implications of macroeconomic policy coordination for the labour market in the UK. Using quarterly macroeconomic indicators (GDP, fiscal, monetary and unemployment) from 1978 to 2007 (30 years, 120 observations) and VEC model, this study intends to examine how fiscal and monetary policy interaction has an impact on labour market in long-term. The results showed that an expansionary fiscal and accommodating monetary stance can be effective to curb unemployment and the economic growth has a positive association with the outlook of labour market. In addition, the expansionary fiscal policy led monetary policy to adopt a contractionary stance and correspondingly the adoption of the contractionary stance by monetary policy compelled fiscal policy towards expansion. The evidence from this study suggests that a policy conflict can lead to adverse impact on the labour market and therefore State Contingent Forward Guidance provided by the Bank of England would require fiscal policy support.

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The Role of Uncertain Government Preferences for Fiscal and Monetary Policy Interaction

This paper explores the role of uncertain government preferences for fiscal and monetary policy interaction. Our analysis shows that the uncertainty about government preferences does not affect the macroeconomic equilibrium if the fiscal multiplier is known. In the case of multiplicative uncertainty, uncertain government preferences make fiscal policy more contractionary, while monetary policy becomes more expansionary. This leads to higher expected inflation and lower expected output, which means a stronger inflation bias.

When Does Government Debt Crowd Out Investment?

We examine when government debt crowds out investment for the US economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced-form regressions are inconclusive about crowding out. At longer horizons, distortionary financing is important for the negative investment response to debt. Copyright © 2013 John Wiley & Sons, Ltd.

Long-term process of reforming the economy of Republic of Serbia in order to achieve macroeconomic stabilization: From transient changes to the activist approach

In today's economy, which is burdened by problems such as non-productive economy, high unemployment rates, constant inflationary pressures, great attention is paid to the interaction of monetary and fiscal policies in order to achieve macroeconomic stability. There is no universal model of economic policy even in countries around the world, nor in the Serbian economy, and policy makers are looking for the optimal design of monetary and fiscal strategies and their synchronization with other non-negligible specific economic policy objectives (in terms of balance of payments, objectives related to foreign currency course, the distribution of income), implemented stage of market reforms of the nineties, and then phase of reforms in the first decade of the 21st century. How good coordination of monetary and fiscal measures can be no qualitative basis, or as it is not possible to reconstruct and degrade previous economic structure, and that there is no definition of the new strategy, and continued the process of reforming and in the period from the time of deepening global financial crisis in 2008 . The Republic of Serbia, a country whose economy in the long process of reforming, seeks better use of comparative advantages, encouraging production and employment, adequate planning and allocation of available resources of its own and charge, absorption of new technologies, intensifying exports, encouraging investment, and with a constant potential danger which increase the vulnerability of small economies. The solid foundations of macroeconomic stability and discipline must be in production, proper allocation of resources, which will run the economy, and then increase the employment rate, and therefore national income. of crucial importance of good projections of macroeconomic aggregates, because of them depend on public revenue and public expenditure.

Stock Return Response to Monetary and Fiscal Policy Interaction in Singapore

The objective of the study is to examine the monetary and fiscal policies’ shock on house price variable by using the structural vector autoregressive (SVAR) model for Singapore economy. In addition, the study used international oil prices and gold prices in the SVAR model because concurrent development in oil and gold prices have central influenced over macroeconomic activities that are closely linked with the stock returns. The results indicate that oil price has significant positive effect on gold prices, interest rates and stock returns. Exchange rate and government expenditure shows a negative impact on oil prices. The inverse relationship between gold prices, exchange rate and stock return supports that gold used as a hedge against both markets. However, there is no evidence has been found for crowding out effect through increase in government expenditures. Interaction between exchange rate and stock return is supportive to both stock-oriented and flow oriented models.

Dealing with the Increasing Public Debt in Egypt

The objective of this paper is to identify the magnitude of the public debt problem in Egypt and to provide some guidelines for policymakers in dealing with the increasing public debt. In the paper, the issue of public debt is looked at as a result of the interaction of fiscal policy and the economic performance, and not as a statistical concept only. It consists of four sections and an introduction. Section (1) provides an identification of the magnitude of the public debt problem in Egypt. Section (2) presents a forecast of the level of public debt in Egypt till the year 2020 using a VAR model. Section (3) provides a forecast for the size of the public debt in Egypt under various scenarios where both economic growth and fiscal policy were considered. Section (4) summarizes the findings and policy recommendations that came out of this study. The conclusions drawn from this research may be summarized as follows. (1) Based on the model used in the paper and public debt indicators, public debt in Egypt is expected to be sustainable till the year 2020. (2) Economic growth has a very strong impact on reducing public debt in Egypt. (3) Fiscal consolidation is very important in reducing public debt because of its impact on economic growth. However, in the process of fiscal consolidation, the Egyptian government has to consider rationalizing spending and not to cut investment spending.

Unemployment and house price crises: Lessons for Fiscal Policy from the Dutch Recession

Since the beginning of the financial crisis in 2008, the Dutch economy lost 6% of gdp relative to Germany, even though the Netherlands (unlike the GIPSI countries) did not face serious problems to finance its sovereign debt. This bad performance is explained by the interaction of fiscal policy and the housing market. This makes the Netherlands an interesting case because these effects can be analyzed in isolation of stress on financial markets. We sketch a simple overlapping generation framework. House price declines lead to a temporary drop in consumption, forcing a reallocation of labour from domestic to tradable industries. This leads to a loss in industry specific human capital, causing a jump in unemployment. The analysis yields a number of lessons for fiscal policy in the aftermath of a financial crisis and for the current EU framework for the evaluation of member states’ fiscal policy. Fiscal policy provided too little intergenerational insurance and the EU framework is an obstacle to do that.

Fiscal Policy: Ex Ante and Ex Post

The surge in fiscal deficits since 2008 has put a renewed focus on our understanding of fiscal policy. The interaction of fiscal and monetary policy during this period has also been the subject of much discussion and analysis. This paper gives new insight into past fiscal policy and its influence on monetary policy by examining the U.S. Federal Reserve Board staff’s Greenbook forecasts of fiscal policy. The authors create a real-time database of the Greenbook forecasts of fiscal policy, examine the forecast performance in terms of bias and efficiency, and explore the implications for the interaction of fiscal policy and monetary policy. The authors also attempt to provide advice for fiscal policy by showing how policymakers learn over time about the trajectory of the U.S. federal government’s fiscal balance as well as the changing roles of structural and cyclical factors.

Integration of Monetary and Fiscal Policy of the Countries of the Visegrad Group

Abstract The aim of this paper is to evaluate mutual interaction of monetary and fiscal policies in the countries of the Visegrad group, i.e. in the Czech Republic, Slovakia, Poland and Hungary. The relationship of monetary and fiscal policy - their coordination, cooperation or mutual antagonism - are basic determinants of successful implementation for economic policy of the state. Fiscal and monetary policies usually have different aims, and some conflict situations may arise in practical economic and political decision- making. Each policy has to make its decision with regard to the other one. Methodical approaches of this contribution are based on the game theory, which deals with the analysis of a wide range of decision situations with more participants (players) and it is primarily focused on the conflict situations. This game-theoretical approach is responsible for creating the theoretical model which is then dealt with in the empirical analysis. We find a distinctly stabilizing role of monetary policy and relatively problematic stabilizing role of fiscal policy in the analyzed countries. The dominant role of monetary policy is statistically confirmed in the case of the Czech Republic and Hungary.