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The fiscal multiplier in presence of unconventional monetary policy: Evidence for 17 OECD countries

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  • Fernández Romero, Daniel

Abstract

Following the exhaustion of conventional interest-rate tools during the 2008 financial crisis, central banks relied on unconventional monetary policy, which ultimately proved insufficient to stimulate aggregate demand. This paper evaluates the interaction between unconventional monetary policy and fiscal stabilization measures. Leveraging annual macro-data for 17 OECD countries spanning 1978–2019—and extending the narrative approach to cover 2016–2019—we introduce a novel country-heterogeneity instrument for unconventional monetary policy. Combining local projections with the Kitagawa-Blinder-Oaxaca decomposition, our analysis estimates the unconventional monetary–fiscal multiplier. The results reveal that, under accommodative monetary conditions, the multiplier ranges between 1.7 and 5, underscoring significant positive interactions between fiscal and unconventional monetary interventions. These findings contribute new empirical insights into policy coordination, showing that joint monetary–fiscal strategies can enhance macroeconomic stabilization.

Suggested Citation

  • Fernández Romero, Daniel, 2025. "The fiscal multiplier in presence of unconventional monetary policy: Evidence for 17 OECD countries," Economic Modelling, Elsevier, vol. 147(C).
    • Handle: RePEc:eee:ecmode:v:147:y:2025:i:c:s0264999325000586
    DOI: 10.1016/j.econmod.2025.107063
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    Keywords

    Fiscal policy; Monetary policy; Regime dependence; Local projections; Narrative method;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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