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The effects of monetary policy across fiscal regimes

Author

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  • Roben Kloosterman
  • Dennis Bonam
  • Koen van der Veer

Abstract

We estimate the effects of monetary policy shocks across contractionary and expansion- ary fiscal regimes in the euro area. An expansionary monetary policy shock leads to an increase in inflation and output growth, but only when it occurs in the expansionary fiscal regime. In a contractionary fiscal regime, the responses to a monetary easing are insignificant or even negative. Similarly, a monetary tightening only reduces inflation and output in the contractionary fiscal regime. These results are robust to several alternative model specifications and underline the importance of the fiscal stance for the monetary transmission mechanism.

Suggested Citation

  • Roben Kloosterman & Dennis Bonam & Koen van der Veer, 2022. "The effects of monetary policy across fiscal regimes," Working Papers 755, DNB.
    • Handle: RePEc:dnb:dnbwpp:755
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    File URL: https://www.dnb.nl/media/orjbctum/working_paper_no_755.pdf
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    References listed on IDEAS

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    Cited by:

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    2. António Afonso & José Alves & Serena Ionta, 2023. "The Effects of Monetary Policy Surprises and Fiscal Sustainability Regimes in the Euro Area," CESifo Working Paper Series 10558, CESifo.

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    More about this item

    Keywords

    regime-dependent effects of monetary policy; fiscal policy regimes; local projection methods;
    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

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