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

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Peter CLAEYS

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

Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Roel Beetsma & Massimo Giuliodori & Franc Klaassen, 2005. "Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis," DNB Working Papers 052, Netherlands Central Bank, Research Department. [Downloadable!]
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