Monetary-fiscal policy relations in the euro area: The impact on the primary balance

Fabienne Dascher-Preising and Alfred Greiner

Journal of Economic Behavior & Organization, 2023, vol. 216, issue C, 1-9

Abstract: With this paper, our objective is to empirically study public debt sustainability by estimating a fiscal reaction function where the primary balance relative to GDP is assumed to be a function of the public debt to GDP ratio of the previous year and of other macroeconomic variables. In particular, we take into account the effects of the lagged real long term interest rate and of the lagged inflation rate on the primary budget of the governments to account for monetary policy influences. We resort to the fixed effects and to the random effects models for a panel of 12 euro area economies from 1996 to 2020. We find statistical evidence for sustainable debt policies and detect that both monetary policy variables are positively correlated with the primary balance to GDP ratio. This holds both for the fixed and for the random effects estimation, when those variables are included simultaneously.

Keywords: Monetary policy; Fiscal policy; Euro area; Primary balance; Public debt sustainability (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 H61 H62 H63 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:216:y:2023:i:c:p:1-9

DOI: 10.1016/j.jebo.2023.09.026

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