Does Monetary Cooperation or Confrontation Lead to Successful Fiscal Consolidation?
AbstractActive 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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Bibliographic InfoPaper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB12-8.
Date of creation: Apr 2012
Date of revision:
Other versions of this item:
- Hellebrandt, T. & Posen, A.S. & Tolle, M., 2012. "Does monetary cooperation or confrontation lead to successful fiscal consolidation?," Financial Stability Review, Banque de France, issue 16, pages 131-142, April.
- NEP-ALL-2012-05-02 (All new papers)
- NEP-CBA-2012-05-02 (Central Banking)
- NEP-MAC-2012-05-02 (Macroeconomics)
- NEP-MON-2012-05-02 (Monetary Economics)
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