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Monetary and fiscal interplay: Does it work both ways?

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  • Afonso, António
  • Sousa, Alexandre

Abstract

We study whether the interplay between monetary and fiscal policies work both ways, in EU countries, for the period 1995–2019. Our results show notably that: i) the inflation rate has a relevant impact over the central banks’ decision making; ii) the cyclically adjusted primary balance reacts positively to increases in the level of government debt; iii) monetary policy reaction functions do not seem to take into consideration the cyclically adjusted primary balance; iv) fiscal policy, via the cyclically adjusted primary balance, seem to be affected by the short-term interest rate in a negative way. The global economic and financial crisis impacted negatively both the short-term nominal interest rates and the cyclically adjusted primary balance, however with a higher degree in the euro area.

Suggested Citation

  • Afonso, António & Sousa, Alexandre, 2024. "Monetary and fiscal interplay: Does it work both ways?," Economic Systems, Elsevier, vol. 48(2).
    • Handle: RePEc:eee:ecosys:v:48:y:2024:i:2:s0939362524000104
    DOI: 10.1016/j.ecosys.2024.101188
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    More about this item

    Keywords

    Monetary policy; Fiscal policy; Reaction functions; Great recession;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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