Monetary and Fiscal Policy Interactions in the Euro Area

The problem of monetary and fiscal policy interactions is an important issue for the euro area, since the individual member states of the EMU are responsible for their fiscal policies but monetary policy is pursued by a single monetary authority, the ECB. This paper is concerned with empirical evidence on monetary and fiscal policy interactions in the euro area. We first explore fiscal regimes with a VAR model and find empirical evidence that a non-Ricardian fiscal policy has been pursued in both France and Germany. As an example, we then study how one member state of the EMU, namely, Italy, is responding to the common monetary policy with its fiscal policy and find that Italian fiscal policy seemed to be counteractive to the common monetary policy between 1979 and 1998. In order to study monetary and fiscal policy interactions in a more general way, we explore time-varying interactions by estimating a State-Space model with Markov-switching for some Euro-area countries. There appear to be some regime changes in monetary and fiscal policy interactions in France and Germany, but the interactions between the two policies are not strong. Moreover, the two policies have not been accommodative but counteractive to each other. Finally we explore forward-looking behavior in policy interactions and find that expectations do not seem to have played an important role in the policy designs.     

Monetary and fiscal policy interactions: Evidence from emerging European economies

This paper examines the interactions between fiscal and monetary policy for some former transition, emerging European economies over the 1995Q1–2010Q4 period by using a Markov regime-switching model. We consider the monetary policy rule proposed by Taylor (1993) and the fiscal policy rule suggested by Davig and Leeper (2007) in accounting for monetary and fiscal policy interactions. Empirical results suggest that monetary and fiscal policy rules exhibit switching properties between active and passive regimes and all countries followed both active and passive monetary policies. As for fiscal policy, the Czech Republic, Estonia, Hungary, and Slovenia seem to have alternated between active and passive fiscal regimes while fiscal policies of Poland and the Slovak Republic can be characterized by a single fiscal regime. Although the policy mix and the interactions between monetary and fiscal policy point a diverse picture in our sample countries, the monetary policy seems to be passive in all countries after 2000. This finding is consistent with the constraints imposed by European Union enlargement on monetary policy.     

Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level

Price determination theory typically focuses on the role of monetary policy, while the role of fiscal policy is usually neglected. From a different point of view, the Fiscal Theory of the Price Level takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. In this paper we try to test empirically whether the time path of the government budget in EMU countries would have affected price level determination. Our results point to the sustainability of fiscal policy in all the EMU countries but Finland, although no firm conclusions can be drawn about the prevalence of either monetary or fiscal dominance.     

Fiscal Transfers in a Monetary Union with Exit Option

It is widely debated whether a monetary union has to be accompanied by a fiscal transfer scheme to accommodate asymmetric shocks. We build a model of a monetary union with a central bank and two heterogeneous countries that are linked by a fiscal transfer scheme with repercussions on monetary policy. A central bank aiming at securing the existence of a monetary union in the presence of asymmetric shocks has to compensate single countries for the tax distortions arising from fiscal transfers. Monetary policy may become more expansionary or restrictive depending on asymmetries between member countries' inflation aversion and exit costs.     

The dynamic effects of monetary policy and government spending shocks on unemployment in the peripheral Euro area countries

In this paper we study the response of unemployment to monetary policy and government spending shocks in the peripheral Euro-area countries. By applying the structural near-VAR methodology, we jointly model area-wide and national variables. Our main finding is that fiscal multipliers vary across countries and the results are consistent with the prediction of the standard New Keynesian model only in Italy and Greece. Instead, in Ireland, Portugal and Spain increases in government spending are recessionary. Thus we find that Keynesian results of fiscal policy seem to prevail in high public-debt countries, whereas non-Keynesian outcomes seem to characterize high private-debt countries. As for the monetary policy shock, we find that it plays an important role, jointly with the other area-wide shocks, as a long-term driver of national unemployment.     

The reaction of disagreements in inflation expectations to fiscal sentiment obtained from information in official communiqués

Using official communiqués about fiscal policy, we develop a fiscal sentiment indicator, and we verify the reaction of disagreements in inflation expectations to fiscal sentiment. This analysis is relevant to inflation targeting (IT) countries because transparency and communication can influence expectations. The results suggest that a more optimistic fiscal sentiment reduces disagreements in inflation expectations. Estimates show that, for higher disagreements in inflation expectations at 12-month maturity, an optimistic fiscal sentiment can reduce the disagreement more sharply. In turn, the fiscal sentiment effect on the disagreement for the 48-month maturity is stronger the smaller the disagreement is. The results allow us to outline the following policy recommendations. First, an optimistic fiscal environment is important in the task of guiding inflation expectations and reducing inflation uncertainty. Second, fiscal communication is an important tool for the expectations formation process, and therefore it must be carefully managed to help in the task of forward guidance of inflation expectations, being important for the IT regime. Third, both fiscal credibility and monetary policy credibility are important for the expectations formation process, particularly for the reduction of inflation uncertainty, representing aspects that must be preserved in countries that adopt the IT regime.     

Financial frictions and optimal stabilization policy in a monetary union

Financial frictions differ across countries and thus cause international differences in the transmission of shocks. This paper shows how the optimal mix of monetary and fiscal policy depends on these country-specific financial frictions. To this end, we build a two-country DSGE-model of a monetary union. Financial frictions are captured by the cost channel approach. We show that the traditional solution to the assignment problem – the common central bank stabilizes the inflation rate at the union level and the national fiscal authorities stabilize the national economies – does not hold in a world with financial frictions. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization even at the union level. Moreover, the more heterogeneous the union, the more important is fiscal policy in stabilizing shocks. Finally, we evaluate the scenarios in terms of welfare of the representative household.     

Indexing Out of Poverty? Fiscal Drag and Benefit Erosion in Cross-National Perspective

We assess how tax-benefit policy developments in 2001–11 affected the household income distribution in seven EU countries. We use the standard microsimulation-based decomposition method, separating further the effect of structural policy changes and the uprating of monetary parameters, which allows us to measure the extent of fiscal drag and benefit erosion in practice. The results show that despite different fiscal effects, policies overall mostly reduced poverty and inequality and both types of policy developments had sizeable effects on the income distribution. We also find that the uprating of monetary parameters not only had a positive effect on household incomes, meaning fiscal drag and benefit erosion were avoided, but generally also contributed more to poverty and inequality reduction than structural policy reforms.     

国际直接投资发展趋向、障碍与对策:2008—2012

国际金融危机的冲击使欧美对外投资能力明显下降,中国等新兴市场国家的对外投资能力有所增强。2011年以来世界范围内发展国际直接投资面临以下现实因素制约:(1)发达国家的量化宽松政策,引起了金融资产价格上涨,并传导到实体部门的资产价格,提高了并购FDI的国际投资成本;(2)欧元区等国家货币有贬值要求,汇率风险加大,以及世界主要国家货币政策和财政政策空间有限,会恶化企业对外FDI的风险态度,减少FDI流出;(3)全球经济衰退,跨国公司产品缺少市场需求;(4)东道国为了弥补财政赤字和偿还债务,税收负担相对较重。     

Inflation targeting and the composition of public expenditure: Evidence from developing countries

An important literature shows that inflation targeting (IT) adoption improves fiscal discipline. Our impact assessment analysis performed in a large sample of 89 developing countries over three decades shows that this favorable impact covers a composition effect: IT adoption is found to reduce more current expenditure compared with public investment in IT countries relative to non-IT countries. This finding is robust to various alternative specification, related to the structure of the sample, the measurement of the IT regime, or the estimation method. Consequently, aside from its acknowledged benefits for monetary policy goals, IT appears as an efficient tool to strengthen fiscal policy in developing countries towards lower and more productive public expenditure.     

Can the ECB be Truly Independent? Should It Be?

Most of the literature on the independence of the Central Bank assumes only one policy instrument is available: monetary policy. If we introduce fiscal policy as well, when preferences may differ among policy-makers, the situation is radically different. In this case fiscal policy will substantially weaken the impact of the Central Bank's actions, and may annihilate them altogether. The Stability Pact may then be a liability, instead of an asset, because it renders both policies impotent (even if credible). We examine whether there is any incentive to retain monetary policy independence; and whether accountability can and should be used to ensure fiscal and monetary policies support each other, rather than undermine each other.     

Fiscal policy and stock market efficiency: An ARDL Bounds Testing approach

The aim of this paper is to investigate the semi-strong market efficiency hypothesis with respect to fiscal policy information, in the context of the Bucharest Stock Exchange. Taking into account that macroeconomic data series of emerging countries usually have a limited size and may be plagued by inconsistencies and structural breaks, this paper proposes an ARDL Bounds testing approach for studying the relationship between stock returns and lagged macroeconomic variables. Moreover, this approach allows us to examine both the long and short-term relationship between fiscal policy and stock returns. The results indicate that, in the long run, stock prices fully and efficiently reflect information on past fiscal policy. However, in the short run, the Romanian stock market reacts efficiently only to unexpected fiscal policy news, while anticipated fiscal policy information displays a significant lagged relationship with current stock returns. In addition, the results also showed that monetary policy information is not incorporated efficiently into stock prices, both in the short and the long run, and its impact on stock returns is larger than the one exerted by fiscal policy.     

Monetary and Fiscal Policy Rules in the EMU

Abstract. This paper studies the design and effects of monetary and fiscal policy in the euro area. To do so, a stylized two‐region model of monetary and fiscal policy rules in the EMU is built. We analyse how monetary and fiscal rules affect the adjustment dynamics in the model. Both the effects on the individual countries and on the EMU aggregate economy are studied. Three aspects play an important role in the analysis: (i) the consequences of alternative monetary and fiscal policy rules, (ii) the consequences of asymmetries between EMU countries (asymmetries in macroeconomic shocks and macroeconomic structures), and (iii) the role of alternative degrees of backward‐ and forward‐looking behaviour in consumer decisions and inflation expectations.     

The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience

The authors investigate the macroeconomic challenges created by a surge in aid inflows. They develop an analytical framework for examining possible policy responses to increased aid, in terms of absorption and spending of aid—where the central bank controls absorption, through monetary policy and the sale of foreign exchange, and where the fiscal authority controls spending. Different combinations of absorption and spending lead to different macroeconomic consequences. Evidence from five countries that recently experienced an aid surge (Ethiopia, Ghana, Tanzania, Mozambique, and Uganda) shows no support for aid-related real exchange rate appreciation in these countries, but it does indicate that the fear of Dutch disease played an important part in the policy reaction to aid surges. Fiscal and monetary authorities should coordinate their responses to an aid surge, because an uncoordinated response—typically when the fiscal authority wants to spend aid while the central bank wants to avoid exchange rate appreciation—can have serious negative macroeconomic consequences.     

International Capital Movement and Monetary Independence in Asia

In this paper, we investigate the extent of monetary independence in a group of ten Asian countries: China, Malaysia, Japan, India, Indonesia, Philippines, Thailand, Korea, Singapore, and Hong Kong. While the traditional investigation has considered only the bivariate relationship between the home interest rate and the base rate, we employ both single-equation and vector autoregressive representations of the bivariate and the trivariate relationship including the desired (or optimal) interest rate. We find in most countries, that the ranking of monetary independence is relatively consistent across the models and methodologies although model specifications produce important differences for some countries such as Japan, Indonesia, and India. Trilemma suggests that a country cannot accomplish all three policy objectives: monetary independence, exchange rate stability, and free capital mobility. To increase monetary independence a country must choose between greater exchange rate flexibility or a lower degree of capital mobility. The fact that China and Malaysia, the two countries that are known to have imposed the strictest capital controls, consistently rank high in various scenarios while Hong Kong, which has maintained nearly the freest regime in capital markets, is lowest in monetary independence, indicates that perhaps capital controls may play a more important role than does exchange rate flexibility in securing independence in monetary policy making. On the other hand, countries that maintain greater exchange rate stability do not necessarily rank low, unless it is combined with greater capital mobility as in the case of Hong Kong.     

What is the right balance between US monetary and fiscal policy? Explorations using simulated wavelet-based optimal tracking control

This paper uses wavelet-based optimal control to simulate fiscal and monetary strategies under different levels of policy restrictions. The model applies the maximal overlap discrete wavelet transform to US quarterly GDP data and then uses the decomposed variables to build a large 80-dimensional state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy is restricted to achieving a steady increase in the market interest rate, (3) only monetary policy is relatively active, while fiscal spending is restricted to achieving a target growth rate, and (4) monetary policy emphasizes short-run stabilization, while fiscal policy utilizes political cycle targeting. The results show that fiscal policy must be more aggressive when the monetary authorities are not accommodating the fiscal expansion and that the dual-emphasis policy leads to a series of interest rate increases that are balanced between a steadily increasing target and a low, fixed rate. This research is the first to construct integrated fiscal and monetary policies in an applied wavelet-based optimal control setting using US data.     

Stock market response to monetary and fiscal policy shocks: Multi-country evidence

A Structural VAR model is employed to investigate the effects of monetary and fiscal policy shocks on stock market performance in Germany, UK and the US. A significant number of past studies have concentrated their attention on the relationship between monetary policy and stock market performance, yet only few on the effects of fiscal policy on stock markets. Even more we know little, if any, on the effects of fiscal and monetary policies on stock market performance when the two policies interact. This study aims to fill this void. Our results show that both fiscal and monetary policies influence the stock market, via either direct or indirect channels. More importantly, we find evidence that the interaction between the two policies is very important in explaining stock market developments. Thus, investors and analysts in their effort to understand the relationship between macroeconomic policies and stock market performance should consider fiscal and monetary policies in tandem rather than in isolation.     

The effects of fiscal spending shocks on the performance of simple monetary policy rules

We examine the effects of fiscal shocks on the performance of alternative monetary policy rules in a small dynamic general equilibrium framework. We explicitly consider the interaction between fiscal and monetary policy rules which may be present in the real world. We use a simple specification for the fiscal policy rule and various specifications for the (simple) monetary policy rule. Our analysis suggests that some form of flexible inflation targeting regime would perform well in response to fiscal shocks compared to other forms of policy regimes.     

Why Economists should Choose their Inheritance: Physics and Path-independence in Economic Systems

Abstract

This paper considers the possibility of using fiscal rather than monetary policy as the instrument of stabilization policy in a new consensus framework. Describing the conduct of fiscal policy in terms of a ‘pseudo Taylor rule’, it is shown that fiscal policy is as, if not more, effective than monetary policy as a tool for macroeconomic stabilization. The conclusion reached is that the comparative neglect of fiscal policy as an instrument of stabilization policy in new consensus macroeconomics is unwarranted.     

Overturning Mundell: Fiscal Policy in a Monetary Union

Central to ongoing debates over the desirability of monetary unions is a supposed trade-off, outlined by Mundell (1961) : a monetary union reduces transactions costs but renders stabilization policy less effective. If shocks across countries are sufficiently correlated, then, according to this argument, delegating monetary policy to a single central bank is not very costly and a monetary union is desirable.
This paper explores this argument in a setting with both monetary and fiscal policies. In an economy with monetary policy alone, we confirm the presence of the trade-off and find that indeed a monetary union will not be welfare improving if the correlation of national shocks is too low. However, fiscal interventions by national governments, combined with a central bank that has the ability to commit to monetary policy, overturn these results. In equilibrium, such a monetary union will be welfare improving for any correlation of shocks.