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Tracking Monetary-Fiscal Interactions across Time and Space

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Listed:
  • Michal Franta
  • Jan Libich
  • Petr Stehlík

Abstract

The fiscal position of many countries is worrying - and getting worse. Should formally independent central bankers be concerned that observed fiscal excesses spill over to monetary policy, and jeopardize price stability? To provide some insights this paper tracks the interactions between fiscal and monetary policies in the data across time and space. It makes three main contributions. The first one is methodological: we combine two recent econometric procedures - time varying parameter vector autoregression with sign restrictions identification - and discuss the advantages of this approach. The second contribution is positive: we show how monetary-fiscal interactions and other macroeconomic variables have changed over time in six industrial countries (Australia, Canada, Japan, Switzerland, the U.K., and the U.S.). The third contribution is normative: the paper highlights the role of institutional design of each policy on the outcomes of both policies. Specifically, it first offers some evidence that an explicit long-term commitment of monetary policy (a legislated numerical target for average inflation) gives the central bank stronger ground for not accommodating debt-financed fiscal shocks. Our second set of (albeit weaker) results then indicates that such threat of a policy tug-of-war may improve the government.

Suggested Citation

  • Michal Franta & Jan Libich & Petr Stehlík, 2012. "Tracking Monetary-Fiscal Interactions across Time and Space," CAMA Working Papers 2012-40, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2012-40
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aleš Melecký & Martin Melecký, 2012. "Vliv makroekonomických šoků na dynamiku vládního dluhu: jak robustní je fiskální pozice České republiky?
      [The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is the Fisca
      ," Politická ekonomie, University of Economics, Prague, vol. 2012(6), pages 723-742.
    2. Libich, Jan & Nguyen, Dat Thanh & Stehlík, Petr, 2015. "Monetary exit and fiscal spillovers," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 184-206.
    3. Andrew HUGHES HALLETT & Jan LIBICH & Petr STEHLÍK, 2014. "Monetary and Fiscal Policy Interaction with Various Degrees of Commitment," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(1), pages 2-29, February.

    More about this item

    Keywords

    Monetary-fiscal interactions; Time-varying parameters VAR; Sign restrictions; Fiscal gap; Unpleasant monetarist arithmetic;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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