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Exit Expectations and Debt Crises in Currency Unions

Alexander Kriwoluzky, Gernot Müller and Martin Wolf ()

No 18/2015, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We study the impact of the interaction between fiscal and monetary policy on the low-frequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation.

Keywords: currency union; exit; sovereign debt crisis; fiscal policy; redenomination premium; euro crisis; regime-switching model (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-opm
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Related works:
Journal Article: Exit expectations and debt crises in currency unions (2019) Downloads
Working Paper: Exit expectations and debt crises in currency unions (2015) Downloads
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