The effects of monetary policy across fiscal regimes

Roben Kloosterman, Dennis Bonam and Koen van der Veer

Journal of Macroeconomics, 2024, vol. 81, issue C

Abstract: How do the effects of monetary policy depend on the fiscal policy stance? We aim to answer this question using a panel smooth transition local projection model for the euro area. We find that an expansionary monetary policy shock raises inflation and output, but only when fiscal policy is also expansionary. In a regime of contractionary fiscal policy, the responses to a monetary easing are insignificant or negative. Similarly, a monetary tightening only reduces inflation and output when accompanied by contractionary fiscal policy. These results are robust to several alternative model specifications and underline the importance of the fiscal stance for the effects of monetary policy.

Keywords: Regime-dependent effects of monetary policy; Fiscal policy regimes; Local projections (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:81:y:2024:i:c:s0164070424000314

DOI: 10.1016/j.jmacro.2024.103616

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