Monetary and fiscal interplay: Does it work both ways?

Antonio Afonso and Alexandre Sousa

Economic Systems, 2024, vol. 48, issue 2

Abstract: We study whether the interplay between monetary and fiscal policies work both ways, in EU countries, for the period 1995–2019. Our results show notably that: i) the inflation rate has a relevant impact over the central banks’ decision making; ii) the cyclically adjusted primary balance reacts positively to increases in the level of government debt; iii) monetary policy reaction functions do not seem to take into consideration the cyclically adjusted primary balance; iv) fiscal policy, via the cyclically adjusted primary balance, seem to be affected by the short-term interest rate in a negative way. The global economic and financial crisis impacted negatively both the short-term nominal interest rates and the cyclically adjusted primary balance, however with a higher degree in the euro area.

Keywords: Monetary policy, Fiscal policy; Reaction functions; Great recession (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 E65 H62 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:48:y:2024:i:2:s0939362524000104

DOI: 10.1016/j.ecosys.2024.101188

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