Do projected fiscal deficits play a role in ECB monetary policymaking?

Linas Jurkšas () and Francisco Pereira
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Linas Jurkšas: Bank of Lithuania, Vilnius University

No 30, Bank of Lithuania Discussion Paper Series from Bank of Lithuania

Abstract: We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly ascertain whether fiscal stance matters for the conduct of monetary policy. We use the GMM and SVAR methods to estimate inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 using the thick-modelling approach. The results reveal that the actions of the ECB have exhibited desirable effects on stabilising monetary policy, and have generally been found to be consistent with the Taylor principle. Most importantly, the projected euro area fiscal deficit is usually not statistically significant in explaining the ECB’s stance on monetary policy. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is always positive, implying that increasing deficits lead to a more restrictive monetary 15:29 2023-05-05policy stance. These findings speak against the fiscal dominance regime in the euro area, where monetary policy is single and fiscal policies are decentralised. The results remain qualitatively similar independent of the prec

Keywords: ECB; monetary policy; reaction function; Taylor rule; fiscal deficits; fiscal stance (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 E61 E62 H62 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2023-05-05
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Working Paper: Do the projected fiscal deficits play a role in ECB monetary policymaking? (2023)
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