Did the Crisis Change it All? Evidence from Monetary and Fiscal Policy
AbstractThe recent financial and economic crisis has triggered bold and diverse policy responses to prevent further, sharper and prolonged adverse effects to the financial and the real sector. The measures for alleviating the cycle were a feature both of the advanced and the emerging and developing economies, albeit less pronounced in the latter. The bulk of extraordinary measures undertaken refers to providing monetary and fiscal stimulus, implying possible change within the monetary and the fiscal policy reaction function. Hence, in this study we estimate monetary and fiscal policy reaction function, on a sample of 61 advanced and emerging and developing countries, using panel techniques. Since the purpose is to assess the potential change in the reaction functions during the recent crisis, estimates are done for the period prior and during the crisis. More precisely, we have analyzed whether monetary and fiscal policies have been more focused on closing the output gap during the recent crisis vis-à-vis the period before the crisis. Our findings prove that the magnitude of the reaction has been much stronger during the crisis period. In addition to this key research question, the analysis investigates whether policy responses in the advanced economies have been stronger compared to the ones in developing economies. Advanced economies appear to have been much more aggressive in stabilizing output during crisis compared to their emerging and developing counterparts. Finally, the role of the constraints - the exchange rate regime, the initial conditions in context of external position (the current account balance and the level of external indebtedness), as well as the fiscal space (public debt) - is also explored. We find that the pegged exchange rate regime, the high current account and the high external indebtedness have constrained monetary authorities to respond to inflation and output during crisis, while there is mixed evidence for the constraining role of the high level of public debt to the fiscal policy reaction.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 43163.
Date of creation: Nov 2010
Date of revision:
global crisis; monetary policy; fiscal policy; policy change; policy constraints; panel;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary 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; Treasury Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
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- Cristina Aurora Bunea-Bontas & Mihaela Cosmina Petre, 2010.
"Fiscal Policy During The Current Crisis,"
Journal of Information Systems & Operations Management,
Romanian-American University, vol. 5(4), pages 48-67, december.
- Kazuhiko Hayakawa, 2009. "First Difference or Forward Orthogonal Deviation- Which Transformation Should be Used in Dynamic Panel Data Models?: A Simulation Study," Economics Bulletin, AccessEcon, vol. 29(3), pages 2008-2017.
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