The Fiscal Channel of Monetary Policy

Max Breitenlechner (), Martin Geiger () and Mathias Klein ()
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Max Breitenlechner: University of Innsbruck
Martin Geiger: Liechtenstein Institute
Mathias Klein: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 469, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We empirically document that contractionary monetary policy shocks, in addition to low ering output and prices, trigger an expansion in primary deficits and government debt. Inflation follows an S-shaped adjustment, implying that monetary policy shifts rather than permanently alters inflation. Structural counterfactuals show that front-loading fiscal con solidation considerably amplifies the monetary effects, and that the timing of consolidation alters the composition of the fiscal adjustment, with distinct implications for real and nom inal outcomes. The temporary impact of a monetary policy shock on prices is more than halved by the endogenous adjustment in social transfers, whereas the tax system significantly reduces the effect on output.

Keywords: Monetary policy; fiscal channel; monetary fiscal policy interaction; structural counterfactuals; Bayesian proxy structural VAR models (search for similar items in EconPapers)
JEL-codes: E32 E52 E63 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2026-08-01
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