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Monetary and budgetary policy interaction: an SVAR analysis of stabilisation policies in monetary union

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  • Peter CLAEYS

Abstract

This paper examines the interaction between monetary and budgetary policy. A comparison of the dynamic responses in di.erent exchange rate regimes offers an assessment of the monetary union case. The analysis proceeds on an SVAR-common trends model. In its current specification, we can only infer responses to the budgetary policy shock. Its identification is obtained by imposing a (long term) solvency condition on government accounts, exploiting automatic stabilisation responses of government revenues, and the imposition of the Fisher relationship. Two main conclusions emerge. Budgetary policy shocks indirectly lead to monetary tightening. Such effects are significant in countries with flexible exchange rate regimes only. Second, policy regime shifts are important.

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Bibliographic Info

Paper provided by European University Institute in its series Economics Working Papers with number ECO2004/22.

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Date of creation: 2004
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Handle: RePEc:eui:euiwps:eco2004/22

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Keywords: SVAR; fiscal policy; monetary policy; policy interaction;

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Cited by:
  1. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2006. "Trade spill-overs of fiscal policy in the European Union: a panel analysis," Economic Policy, CEPR & CES & MSH, vol. 21(48), pages 639-687, October.

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