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The Fiscal Channel of Monetary Policy

Author

Listed:
  • Breitenlechner, Max

    (University of Innsbruck)

  • Geiger, Martin

    (Liechtenstein Institute)

  • Klein, Mathias

    (Research Department, Central Bank of Sweden)

Abstract

We empirically document that contractionary monetary policy shocks, in addition to low ering output and prices, trigger an expansion in primary deficits and government debt. Inflation follows an S-shaped adjustment, implying that monetary policy shifts rather than permanently alters inflation. Structural counterfactuals show that front-loading fiscal con solidation considerably amplifies the monetary effects, and that the timing of consolidation alters the composition of the fiscal adjustment, with distinct implications for real and nom inal outcomes. The temporary impact of a monetary policy shock on prices is more than halved by the endogenous adjustment in social transfers, whereas the tax system significantly reduces the effect on output.

Suggested Citation

  • Breitenlechner, Max & Geiger, Martin & Klein, Mathias, 2026. "The Fiscal Channel of Monetary Policy," Working Paper Series 469, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0469
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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