Fiscal and Monetary Policy Shocks and Private Sector Activity: Evidence Across Countries

JoaÞo Tovar Jalles and Leandro Gaston Andrian

No 14678, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: This paper examines the relationship between fiscal- and monetary-policy shocks and private-sector outcomes, with a focus on private investment, private credit, and firm creation, by using an annual panel of 148 countries over the period 19702023. We construct measures of cyclically adjusted fiscal shocks and forecast-error monetary shocks and analyze their association with private-sector activity using long-run panel regressions and state-dependent local projections. The average long-run relationships between policy shocks and private-sector outcomes are generally weak and often statistically insignificant. Yet substantial heterogeneity does emerge across countries with different levels of fiscal space, financial development, informality, inequality, and institutional quality. Fiscal expansions are more strongly associated with private-sector activity in low-debt, institutionally stronger environments, while monetary easing is linked to greater firm creation and credit growth in financially constrained and highly informal economies. Overall, the findings suggest that the relationship between macroeconomic policy shocks and private-sector development depends critically on structural and institutional characteristics.

Keywords: Private Credit; Fiscal Shocks; Monetary Shocks; Firm creation (search for similar items in EconPapers)
JEL-codes: E52 E62 F34 O16 O23 (search for similar items in EconPapers)
Date: 2026-07
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Persistent link: https://EconPapers.repec.org/RePEc:idb:brikps:14678

DOI: 10.18235/0014433

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