Made in Europe: Monetary–Fiscal policy mix with financial frictions

Pedro Gomes and Hernán Seoane

European Economic Review, 2024, vol. 165, issue C

Abstract: We study the role of fiscal and monetary policies in a financially constrained economy. An active monetary–passive fiscal regime amplifies technology shocks, mitigates preference shocks, and neutralizes the expansionary effects of fiscal shocks through “debt deflation” and “real interest rate” channels, compared to an active fiscal–passive monetary policy regime. Several features of the data suggest that in the aftermath of the 2007 Financial crisis, the monetary policy in the United States was more dovish than in the Euro Area while fiscal policy seemed less concerned about the dynamics of sovereign debt, implying that the distinct post-crisis dynamics of the United States and the Euro area can be rationalized through different fiscal and monetary policy mixes.

Keywords: Fiscal policy; Monetary policy; Monetary–fiscal policy interactions; Financial frictions (search for similar items in EconPapers)
JEL-codes: E32 E44 E62 E63 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:165:y:2024:i:c:s0014292124000564

DOI: 10.1016/j.euroecorev.2024.104727

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