Fiscal sustainability, monetary policy and economic growth in the Euro Area: In search of the ultimate causal path

Antonio Golpe, A. Jesus Sánchez-Fuentes and José Carlos Vides

Economic Analysis and Policy, 2023, vol. 78, issue C, 1026-1045

Abstract: To assess the ultimate causal flow between monetary policy indicators, fiscal sustainability and economic growth has been deeply studied in the literature. However, this issue is still open to discussion due to mixed results and caveats/limitations of existing studies. Importantly, previous analyses mostly focus on bivariate/trivariate systems, missing a relevant piece of economic drivers. We analyse jointly these interdependencies by applying multivariate Granger Causality and determining an ultimate ”causality path” excluding redundant relationships. Thus, we combine recent developments introduced to estimate the Granger causality procedure based on Meta-analysis in heterogeneous mixed panels and graphical models searching iteratively for the existing dependencies between a multivariate set of information. Our results provide novel empirical evidence suggesting that monetary policy variables play a leading role in the resulting complex economic system. Furthermore, we do find evidence supporting the role of Total Expenditure as a driver of fiscal policy.

Keywords: Granger causality; Monetary policy; Public finance; Causal maps; PC algorithm (search for similar items in EconPapers)
JEL-codes: C33 C51 H60 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecanpo:v:78:y:2023:i:c:p:1026-1045

DOI: 10.1016/j.eap.2023.04.038

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