Debt and Stabilization Policy: Evidence from a Euro Area FAVAR

Laura E. Jackson, Michael Owyang and Sarah Zubairy
Authors registered in the RePEc Author Service: Laura Jackson Young and Laura Jackson

No 2017-22, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The Euro-area poses a unique problem in evaluating policy: a currency union with a shared monetary policy and country-specific fiscal policy. Analysis can be further complicated if high levels of public debt affect the performance of stabilization policy. We construct a framework capable of handling these issues with an application to Euro-Area data. In order to incorporate multiple macroeconomic series from each country but, simultaneously, treat country-specific fiscal policy, we develop a hierarchical factor-augmented VAR with zero restrictions on the loadings that yield country-level factors. Monetary policy, then, responds to area-wide conditions but fiscal policy responds only to its country level conditions. We find that there is broad quantitative variation in different countries'' responses to area-wide monetary policy and both qualitative and quantitative variation in responses to country-specific fiscal policy. Moreover, we find that debt conditions do not diminish the effectiveness of policy in a significant manner, suggesting that any negative effects must come through other channels.

Keywords: Government spending; monetary policy; European Monetary Union; debt (search for similar items in EconPapers)
JEL-codes: C32 E58 E62 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2017-07-27
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-eec and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Debt and stabilization policy: Evidence from a Euro Area FAVAR (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2017-022

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DOI: 10.20955/wp.2017.022

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