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Monetary-Fiscal Crosswinds in the European Monetary Union

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  • Reichlin, Lucrezia
  • Ricco, Giovanni
  • Tarbé, Matthieu

Abstract

We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy can be analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the real discount rate declines, absorbing the increase in deficit due to the fiscal policy leaning towards the easing. Conversely, in response to an unconventional easing of the long end of the yield curve, the discount rate declines strongly, while the primary fiscal surplus barely moves. The long-run effect of unconventional monetary easing on inflation is about half than that of conventional, a result which also explains the muted response of fiscal policy. Results do not point to large differences across countries.

Suggested Citation

  • Reichlin, Lucrezia & Ricco, Giovanni & Tarbé, Matthieu, 2021. "Monetary-Fiscal Crosswinds in the European Monetary Union," CEPR Discussion Papers 16138, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16138
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    1. is not listed on IDEAS
    2. Kloosterman, Roben & Bonam, Dennis & van der Veer, Koen, 2024. "The effects of monetary policy across fiscal regimes," Journal of Macroeconomics, Elsevier, vol. 81(C).
    3. Roben Kloosterman & Dennis Bonam & Koen van der Veer, 2022. "The effects of monetary policy across fiscal regimes," Working Papers 755, DNB.
    4. Lukas Berend & Jan Pruser, 2025. "Large structural VARs with multiple linear shock and impact inequality restrictions," Papers 2505.19244, arXiv.org, revised Jul 2025.
    5. Ling Wang, 2025. "Bank financing for SMEs in times of crisis: when “whatever-it-takes” confronts “black swans”," Small Business Economics, Springer, vol. 65(2), pages 777-812, August.
    6. Afonso, Antonio & Alves, José & Ionta, Serena, 2025. "Monetary policy surprise shocks under different fiscal regimes: A panel analysis of the Euro Area," Journal of International Money and Finance, Elsevier, vol. 156(C).
    7. Bouabdallah, Othman & Jacquinot, Pascal & Patella, Valeria, 2023. "Monetary/fiscal policy regimes in post-war Europe," Working Paper Series 2871, European Central Bank.
    8. repec:ecb:ecbdps:202426 is not listed on IDEAS
    9. Serena Ionta & António Afonso & José Alves, 2025. "Monetary policy surprises and fiscal sustainability: the case of the Euro Area," Economic Change and Restructuring, Springer, vol. 58(3), pages 1-20, June.
    10. Michele Andreolli & Hélène Rey, 2024. "Fiscal Consequences of Missing an Inflation Target," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 701-772, June.
    11. António Afonso & José Alves & Serena Ionta, 2023. "The Effects of Monetary Policy Surprises and Fiscal Sustainability Regimes in the Euro Area," CESifo Working Paper Series 10558, CESifo.
    12. Rant, Vasja & Puc, Anja & Čok, Mitja & Verbič, Miroslav, 2024. "Macroeconomic impacts of monetary and fiscal policy in the euro area in times of shifting policies: A SVAR approach," Finance Research Letters, Elsevier, vol. 64(C).

    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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