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

Linas Jurkšas and Francisco Pereira

No 2023/0258, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly find if fiscal stance matters for the monetary policy conduct. We use GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 with the thick-modelling approach. The results revealed that ECB actions have exhibited desirable stabilising monetary policy properties and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit usually is not statistically significant in explaining ECB monetary policy stance. 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 policy 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 precise specification of the GMM and SVAR models and if the sample period is shortened from 2012.

Keywords: ECB; monetary policy; reaction function; Taylor rule; fiscal deficits; fiscal stance (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 E61 E62 H62 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Working Paper: Do projected fiscal deficits play a role in ECB monetary policymaking? (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp02582023

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