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The Interplay between Monetary and Fiscal Policies in the EU

Antonio Afonso and Alexandre Sousa

No 2020/0153, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We study the interactions between monetary and fiscal policiesin the EU countries, for the period 1995-2019. Our results show notably that: i) the inflation rate has a relevantimpact over the central banks’ decision making; ii) the cyclically adjusted primary balance reacts positively to increases in the level of government debt; iii) monetary policy reaction functions do not seem to take into consideration the cyclically adjusted primary balance; iv) fiscal policy, via the cyclically adjusted primary balance, seem to be affected by the short-term interest rate in a negative way.The global economic and financial crisis impacted negatively both the short-term nominal interest rates and the cyclically adjusted primary balance, however with a higher degree in the euro area.

Keywords: Monetary Policy, Fiscal Policy; Reaction Functions; Great Recession (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 E65 H62 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: Add references at CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp01532020

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