The Effects of Monetary and Fiscal Policies on the Output Costs of Sudden Stops

Kawin Iamtrakul and Thomas Willett
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Kawin Iamtrakul: Ministry of Finance, Thailand2Claremont Institute for Economic Policy Studies (CIEPS), USA
Thomas Willett: Claremont Graduate University and Claremont McKenna College, Claremont Institute for Economic Policy Studies (CIEPS), USA

Journal of International Commerce, Economics and Policy (JICEP), 2020, vol. 11, issue 02, 1-24

Abstract: There has been controversy about the appropriate responses of monetary and fiscal policies to sudden stops of capital inflows. There have been concerns that expansionary policies could undermine confidence leading to currency depreciation and a worsening of the crisis. Previous literature has generally found favorable effects from fiscal expansion and mixed results for monetary policy. We revisit this issue using more recent data and alternative measures of monetary policy. We find considerable support for the view that expansionary monetary policy reduces output costs of sudden stops and no significant evidence that the costs are increased. We find that fiscal expansion by countries with low levels of debt is expansionary, but that these effects can become negative at high levels of debt.

Keywords: Monetary policy; fiscal policy; output costs; sudden stops (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S179399332050009X

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