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Does Monetary Cooperation or Confrontation Lead to Successful Fiscal Consolidation?

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  • Tomas Hellebrandt

    (Bank of England)

  • Adam S. Posen

    ()
    (Peterson Institute for International Economics)

  • Marilyne Tolle

    (Bank of England)

Abstract

Active accommodation of fiscal consolidations by monetary policy is controversial, as can be seen in current euro area discussions. While many observers acknowledge that there is usually a place for monetary accommodation in response to fiscal consolidation, a sequencing argument is often heard today that fiscal commitment must precede any loosening. Some analysts go further to suggest that toughness by central banks taking a hard line on adjustment is critical to inducing sustained fiscal stabilization. This policy brief looks at the recent historical record of central bank behavior vis-�-vis fiscal authorities, at least until the current crisis period, and whether accommodative approaches ahead of consolidations have proven dangerous or helpful. The authors also try to assess the market credibility of fiscal consolidations as a function of the central banks' monetary stance prior to fiscal consolidation. They find clear evidence of positive associations between the degree of monetary ease in advance of fiscal consolidation programs and both those programs' success and their market credibility. For a wide range of cases of fiscal consolidation, monetary policymakers did not hesitate to pursue accommodative policies and try to improve economic conditions ahead of those programs' implementation.

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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB12-8.

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Date of creation: Apr 2012
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Handle: RePEc:iie:pbrief:pb12-8

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  1. Avinash Dixit & Luisa Lambertini, 2003. "Interactions of Commitment and Discretion in Monetary and Fiscal Policies," American Economic Review, American Economic Association, vol. 93(5), pages 1522-1542, December.
  2. Alan J. Auerbach & William G. Gale & Benjamin H. Harris, 2010. "Activist Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 24(4), pages 141-64, Fall.
  3. C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis," Policy Briefs PB12-1, Peterson Institute for International Economics.
  4. Antonio Fatás & Ilian Mihov, 2009. "Why Fiscal Stimulus is Likely to Work," International Finance, Wiley Blackwell, vol. 12(1), pages 57-73, 05.
  5. Andrea Pescatori & Daniel Leigh & Jaime Guajardo & Pete Devries, 2011. "A New Action-Based Dataset of Fiscal Consolidation," IMF Working Papers 11/128, International Monetary Fund.
  6. Kenneth N. Kuttner, 2001. "Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks," Working Papers 52, Oesterreichische Nationalbank (Austrian Central Bank).
  7. Jean-François Segalotto & Marco Arnone & Bernard Laurens, 2006. "Measures of Central Bank Autonomy," IMF Working Papers 06/228, International Monetary Fund.
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