The effects of monetary policy surprises and fiscal sustainability regimes in the Euro Area
Antonio Afonso,
José Alves and
Serena Ionta
No 2023/0281, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa
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: 2023-07
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
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Citations: View citations in EconPapers (3)
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Related works:
Working Paper: The Effects of Monetary Policy Surprises and Fiscal Sustainability Regimes in the Euro Area (2023) 
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp02812023
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