Can central banks do the unpleasant job that governments should do?

Vasiliki Dimakopoulou, George Economides, Apostolis Philippopoulos () and Vanghelis Vassilatos
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Vasiliki Dimakopoulou: Foundation for Economic and Industrial Research (IOBE), and Athens University of Economics and Business
Apostolis Philippopoulos: Athens University of Economics and Business, CESifo, Hellenic Observatory at the LSE, and Hellenic Fiscal Council
Vanghelis Vassilatos: Athens University of Economics and Business

No 324, Working Papers from Bank of Greece

Abstract: We investigate what happens when the fiscal authorities do not react to rising public debt so that the unpleasant task of fiscal sustainability falls upon the Central Bank (CB). In particular, we explore whether the CB's bond purchases in the secondary market can restore stability and determinacy in an otherwise unstable economy. This is investigated in a dynamic general equilibrium model calibrated to the Euro Area (EA) and where monetary policy is conducted subject to the numerical rules of the Eurosystem (ES). We show that given the recent situation in the ES, and to the extent that a relatively big shock hits the economy, there is no room left for further quasi-fiscal actions by the ECB; there will be room only if the ES' rules are violated. We then search for policy mixes that can respect the ES's rules and show that debt-contingent fiscal and quantitative monetary policies can reinforce each other; this confirms the importance of policy complementarities.

Keywords: Central banking; Fiscal policy; Debt stabilization; Euro Area (search for similar items in EconPapers)
Pages: 65
Date: 2023-12
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Can central banks do the unpleasant job that governments should do? (2024)
Working Paper: Can Central Banks Do the Unpleasant Job That Governments Should Do? (2023)
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