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What is the Fiscal Stress in Euro Area? Evidence from a Joint Monetary-Fiscal Structural Model

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  • Eddie Gerba

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Abstract

I examine the importance of fiscal policy in stabilizing the Euro Area economy and the degree of interaction with monetary policy. The results provide solid evidence of a common fiscal reaction in the monetary union despite the lack of a formal fiscal union. I identify area-wide shocks and find statistically significant (endogenous) responses of fiscal policies to shocks. I also find strong evidence for interactions between fiscaland monetary policy. Said that, the nature of interactions depends very much on the shocks that hit the economy. At the same time, the way the two fiscal policies interact with monetary policy is also different and independent of each other. Furthermore, the spending multiplier is higher than the tax multiplier. Nonetheless, their relative efficacy has changed over time, with the spending (tax) multiplier falling (rising) since the onset of the Great Recession. To conclude, there are considerable differences in the nature of Euro Area monetary-fiscal interactions compared to the US. Not only are the impulse responses to different shocks significantly different, but also the fiscal multipliers vary a lot. Keynesian (or spending-oriented) fiscal policy is more effective in expanding output in the Euro Area while tax reductions are more effective in the US. ****** El artículo estudia la importancia de la política fiscal en la estabilización de la economía de la Zona Euro y el grado de interacción con la política monetaria. Los resultados ofrecen evidencia sólida de una reacción fiscal común en la unión monetaria a pesar de que formalmente no existe una unión fiscal. Se identifican los choques a nivel de la zona y se encuentra que las respuestas (endógenas) de las políticas fiscales a esos choques son estadísticamente significativas. Asimismo se encuentra evidencia fuerte de la interacción entre las políticas fiscal y monetaria. No obstante, la naturaleza de esa interacción depende mucho del tipo de los choques. Además, la forma en que cada uno de los dos tipos de política fiscal interactúa con la política monetaria es diferente e independiente de la otra. Adicionalmente el multiplicador del gasto es mayor que el de los impuestos; sin embargo, su relativa eficacia ha variado en el tiempo, con el multiplicador del gasto (impuesto) cayendo (aumentando) desde el comienzo de la Gran Recesión. Finalmente, se hallan diferencias considerables en la naturaleza de las interacciones de las políticas fiscal y monetaria entre la zona euro y los Estados Unidos. Aparte de que los impulso respuestas a los diferentes choques son significativamente diferentes, los multiplicadores fiscales varían demasiado. La política fiscal keynesiana (u orientada al gasto) es más efectiva en expandir la actividad económica en la Zona Euro mientras que las reducciones de impuestos son más efectivas en los Estados Unidos.

Suggested Citation

  • Eddie Gerba, 2018. "What is the Fiscal Stress in Euro Area? Evidence from a Joint Monetary-Fiscal Structural Model," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 36(85), pages 21-47, April.
  • Handle: RePEc:bdr:ensayo:v:36:y:2018:i:85:p:21-47
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    References listed on IDEAS

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    Keywords

    Structural BVAR; Sign restrictions; Fiscal multipliers; Fiscal and monetary transmission; Debt channel; BVAR estructural; Restricciones de signo; Multiplicadores fiscales; Transmisión monetaria y fiscal; Canal de la deuda;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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; Treasury Policy

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