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The Effects of Monetary Policy Surprises and Fiscal Sustainability Regimes in the Euro Area

Antonio Afonso, José Alves and Serena Ionta

No 10558, CESifo Working Paper Series from CESifo

Abstract: We study the effect of monetary surprise shocks on real output and the price level, conditioned on different fiscal sustainability regimes in the period 2001Q4-2021Q4. First, we estimate time-varying fiscal sustainability coefficients based on Bohn’s (1998) approach through Schlicht’s (2003) method. Then, by taking these sustainability coefficients in a nonlinear local projection model for the Euro Area (aggregate data), Germany, Italy, and Portugal, we analyze the interaction between both policies under (un)sustainable fiscal regimes. Our results show that in a Ricardian regime, output and prices respond to monetary tightening by contracting, while in a non-Ricardian regime the effect on output and price levels is negligible (or even positive). The dependence of the effectiveness of monetary policy on fiscal solvency is valid for Euro-Area and all the countries assessed, and does not depend on whether a country is “core” or “periphery”, but on the policy conduct over time.

Keywords: monetary surprises; fiscal sustainability; local-projection models; fiscal-monetary policy mix; Euro area; Germany; Italy; Portugal (search for similar items in EconPapers)
JEL-codes: C32 E58 E62 E63 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-eec and nep-mon
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Citations: View citations in EconPapers (1)

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