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Fighting fiscal dominance. The case of Spain, 1874–1998

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  • Marcela Sabaté
  • Regina Escario
  • Maria Dolores Gadea

Abstract

The recent financial crisis has placed the concept of fiscal dominance at the center of current debates on macro-prudential policies. However, empirical evidence of fiscal dominance, understood as fiscal policy driving monetary policy, has been mixed, especially for low inflation countries. The literature hypothesizes that institutional constraints are the reason for the failure to connect deficits to money and prices in these countries. This paper, focusing on Spain 1874–1998, illustrates their constraining role in two steps. First, a recursive estimation of the link from budget to money shows how the degree of fiscal dominance varied over time. Second, we are able to establish a connection between these changes in the intensity of fiscal dominance and changes in the intensity of the institutional (exchange rate and central bank independence) constraints.

Suggested Citation

  • Marcela Sabaté & Regina Escario & Maria Dolores Gadea, 2015. "Fighting fiscal dominance. The case of Spain, 1874–1998," European Review of Economic History, European Historical Economics Society, vol. 19(1), pages 23-43.
    • Handle: RePEc:oup:ereveh:v:19:y:2015:i:1:p:23-43.
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    File URL: http://hdl.handle.net/10.1093/ereh/heu020
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    Cited by:

    1. Matthias Morys, 2015. "Any lessons for today? Exchange-rate stabilisation in Greece and South-East Europe between economic and political objectives and fiscal reality, 1841-1939," Centre for Historical Economics and Related Research at York (CHERRY) Discussion Papers 15/01, CHERRY, c/o Department of Economics, University of York.
    2. Matthias Morys, 2016. "Financial supervision to fight fiscal dominance? The gold standard in Greece and South-East Europe between economic and political objectives and fiscal reality, 1841-1939," Discussion Papers 16/05, Department of Economics, University of York.
    3. Donato Masciandaro & Davide Romelli & Stefano Ugolini, 2023. "Fiscal Dominance, Monetary Policy and Exchange Rates: Lessons from Early-Modern Venice," BAFFI CAREFIN Working Papers 23205, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    4. Afonso, António & Jalles, João Tovar, 2019. "The Fiscal consequences of deflation: Evidence from the Golden Age of Globalization," The Quarterly Review of Economics and Finance, Elsevier, vol. 74(C), pages 129-147.
    5. Sabaté, Marcela & Fillat, Carmen & Escario, Regina, 2019. "Budget deficits and money creation: Exploring their relation before Bretton Woods," Explorations in Economic History, Elsevier, vol. 72(C), pages 38-56.

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