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Monetary financing and fiscal discipline

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  • Hülsewig, Oliver
  • Steinbach, Armin

Abstract

Rules governing monetary state financing vary across jurisdictions. The mainstream rationale for bans of state financing rests on the empirical assumption that monetary financing undermines fiscal discipline. We address the plausibility of this assumption by estimating local projection models for a panel of euro area countries to explore the reaction of the sovereigns’ fiscal position to a monetary policy shock. Our results suggest that fiscal discipline is not waning after an expansionary monetary policy innovation that can be related to non-standard policy interventions, as expressed through an improvement of the primary balance despite declining borrowing costs. While no compelling inferences can be made as to the driving force of this improvement – political pressure channeled through conditionality may be a plausible explanation – our results suggest that empirical claims on the adverse effect of unconventional monetary policy on fiscal discipline are ill-founded.

Suggested Citation

  • Hülsewig, Oliver & Steinbach, Armin, 2021. "Monetary financing and fiscal discipline," International Review of Law and Economics, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:irlaec:v:68:y:2021:i:c:s0144818821000284
    DOI: 10.1016/j.irle.2021.106004
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    More about this item

    Keywords

    Monetary financing; Fiscal discipline; Local projections; Monetary policy surprises;
    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
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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