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Fiscal and Monetary Policy Shocks and Private Sector Activity: Evidence Across Countries

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  • Tovar Jalles, JoaÞo
  • Andrian, Leandro Gaston

Abstract

This paper examines the relationship between fiscal- and monetary-policy shocks and private-sector outcomes, with a focus on private investment, private credit, and firm creation, by using an annual panel of 148 countries over the period 19702023. We construct measures of cyclically adjusted fiscal shocks and forecast-error monetary shocks and analyze their association with private-sector activity using long-run panel regressions and state-dependent local projections. The average long-run relationships between policy shocks and private-sector outcomes are generally weak and often statistically insignificant. Yet substantial heterogeneity does emerge across countries with different levels of fiscal space, financial development, informality, inequality, and institutional quality. Fiscal expansions are more strongly associated with private-sector activity in low-debt, institutionally stronger environments, while monetary easing is linked to greater firm creation and credit growth in financially constrained and highly informal economies. Overall, the findings suggest that the relationship between macroeconomic policy shocks and private-sector development depends critically on structural and institutional characteristics.

Suggested Citation

  • Tovar Jalles, JoaÞo & Andrian, Leandro Gaston, 2026. "Fiscal and Monetary Policy Shocks and Private Sector Activity: Evidence Across Countries," IDB Publications (Working Papers) 14678, Inter-American Development Bank.
    • Handle: RePEc:idb:brikps:14678
    DOI: http://dx.doi.org/10.18235/0014433
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    Keywords

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    JEL classification:

    • 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
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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