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Do projected fiscal deficits play a role in ECB monetary policymaking?

Author

Listed:
  • Linas Jurkšas

    (Bank of Lithuania, Vilnius University)

  • Francisco Gomes Pereira

    (ISEG – Universidade de Lisboa, REM)

Abstract

We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly ascertain whether fiscal stance matters for the conduct of monetary policy. We use the GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 using the thick-modelling approach. The results reveal that the actions of the ECB have exhibited desirable effects on stabilising monetary policy, and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit is usually not statistically significant in explaining the ECB’s stance on monetary policy. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary 15:29 2023-05-05policy stance. These findings speak against the fiscal dominance regime in the euro area, where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the prec

Suggested Citation

  • Linas Jurkšas & Francisco Gomes Pereira, 2023. "Do projected fiscal deficits play a role in ECB monetary policymaking?," Bank of Lithuania Discussion Paper Series 30, Bank of Lithuania.
    • Handle: RePEc:lie:dpaper:30
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    More about this item

    Keywords

    ECB; monetary policy; reaction function; Taylor rule; fiscal deficits; fiscal stance;
    All these keywords.

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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