Monetary and budgetary policy interaction: an SVAR analysis of stabilisation policies in monetary union

Peter Claeys

No ECO2004/22, Economics Working Papers from European University Institute

Abstract: This paper examines the interaction between monetary and budgetary policy. A comparison of the dynamic responses in di.erent exchange rate regimes offers an assessment of the monetary union case. The analysis proceeds on an SVAR-common trends model. In its current specification, we can only infer responses to the budgetary policy shock. Its identification is obtained by imposing a (long term) solvency condition on government accounts, exploiting automatic stabilisation responses of government revenues, and the imposition of the Fisher relationship. Two main conclusions emerge. Budgetary policy shocks indirectly lead to monetary tightening. Such effects are significant in countries with flexible exchange rate regimes only. Second, policy regime shifts are important.

Keywords: SVAR; fiscal policy; monetary policy; policy interaction (search for similar items in EconPapers)
JEL-codes: E62 E63 (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-ets, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eui:euiwps:eco2004/22

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