Domestic policies and external spillovers

Purpose - Using data for a sample of advanced and developing countries, this paper aims to study the responses of monetary growth and the growth of government spending to external spillovers, namely, the growth of exports and imports, movement in the real effective exchange rate and the change in the oil price. The objective is to study movements in domestic policy variables in open economies that are vulnerable to trade and commodity price shocks. Design/methodology/approach - The analysis evaluates correlations between the responses of the policy variables to external spillovers. Further, the analysis studies the effects of indicators of economic performance on domestic policy responses to various shifts across countries. Findings - Higher variability of real and nominal growth increases the fiscal policy response to external spillovers with an aim to stem further variability. Monetary policies appear to be more responsive to trend price inflation with an aim to stem further inflationary pressures. Fiscal policy’s reaction to trend price inflation aims at striking a balance between countering potential inflationary pressures, as well as recessionary conditions attributed to the various spillovers. Originality/value - Overall, the evidence points to the importance of trade and commodity price shifts to the design of domestic policies. Further indicators of economic performance differentiate the degree of policy responses to trade and commodity price developments with a goal to stem inflationary pressures and reduce aggregate uncertainty.