Working Paper: CEPR ID: DP3426
Authors: Carlo A. Favero
Abstract: The objective of this study is to investigate the behaviour of monetary and fiscal authorities in the Euro area. Our main contribution is joint modeling of behaviour of the two authorities. Our investigation highlights a number of facts. The systematic monetary policies adopted by the non-German authorities in the seventies were not capable of stabilizing inflation. Such results have been achieved in the eighties and the nineties by anchoring more tightly domestic monetary policy to German monetary policy. All the main episodes of expansionary fiscal policy which have occurred in the course of the eighties and the nineties in Europe cannot be explained by the systematic behaviour of fiscal authorities. Stabilization of inflation has been achieved independently from the lack of fiscal discipline. There are important interactions between the two authorities but they depend exclusively on the responses of governments expenditures and receipts to interest rate payments on the public debt.
Keywords: Euro Area; Fiscal Policy; Monetary Policy
JEL Codes: E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| systematic monetary policies adopted by non-German authorities in the 1970s (E58) | inflation stabilization (E31) |
| monetary policy alignment with German monetary policy (E52) | inflation stabilization (E31) |
| expansionary fiscal policy during the 1980s and 1990s (E65) | systematic behaviour of fiscal authorities (E62) |
| government responses to interest rate payments on public debt (H63) | interactions between monetary and fiscal authorities (E63) |
| interactions between monetary and fiscal authorities (E63) | behaviour of monetary authorities (E58) |