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The impact of constrained monetary policy on fiscal multipliers on output and inflation

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  • Bletzinger, Tilman
  • Lalik, Magdalena

Abstract

This paper uses two established DSGE models (QUEST III and Smets-Wouters) to assess the impact of fiscal spending cuts on output and, in particular, also on inflation in the euro area under alternative settings for monetary policy. We compare four different settings of constrained monetary policy, taking into account alternative agents’ expectations about future monetary policy. We illustrate that those expectations are even more important for the size of the fiscal multipliers than the difference between exogenously versus endogenously modelled constraints. We confirm the well-known finding that fiscal multipliers exhibit an over-proportional reaction when monetary policy is constrained. The novelty of our results is that this over-proportionality is stronger for the fiscal multiplier on inflation than on output. We relate this finding to the structural parameters of the models by means of a Global Sensitivity Analysis. JEL Classification: E31, E43, E52, E62, E63

Suggested Citation

  • Bletzinger, Tilman & Lalik, Magdalena, 2017. "The impact of constrained monetary policy on fiscal multipliers on output and inflation," Working Paper Series 2019, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20172019
    Note: 2652553
    as

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    References listed on IDEAS

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    Cited by:

    1. Wieland, Volker & Binder, Michael & Lieberknecht, Philipp & Quintana, Jorge, 2017. "Model Uncertainty in Macroeconomics: On the Implications of Financial Frictions," CEPR Discussion Papers 12013, C.E.P.R. Discussion Papers.
    2. Burriel, Pablo & Checherita-Westphal, Cristina & Jacquinot, Pascal & Stähler, Nikolai & Schön, Matthias, 2020. "Economic consequences of high public debt: evidence from three large scale DSGE models," Working Paper Series 2450, European Central Bank.
    3. Eduardo Garzón Espinosa & Bibiana Medialdea García & Esteban Cruz Hidalgo, 2021. "Fiscal Policy Approaches: An Inquiring Look From The Modern Monetary Theory," Journal of Economic Issues, Taylor & Francis Journals, vol. 55(4), pages 999-1022, October.
    4. Grancini, Stefano, 2021. "Risk Aversion and Fiscal Consolidation Programs," MPRA Paper 105500, University Library of Munich, Germany.

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    More about this item

    Keywords

    constrained monetary policy; fiscal multipliers; zero lower bound;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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