Monetary-fiscal policy interaction and fiscal inflation: a tale of three countries
Open access
Date
2015-10Type
- Working Paper
ETH Bibliography
yes
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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. Show more
Permanent link
https://doi.org/10.3929/ethz-a-010692098Publication status
publishedJournal / series
KOF Working PapersVolume
Publisher
KOF Swiss Economic Institute, ETH ZurichSubject
ECONOMETRICS AND ECONOMETRIC MODELS (OPERATIONS RESEARCH); FISKALPOLITIK; INTERNATIONAL COMPARISONS (POINT OF VIEW); Inflation; Time-Varying VAR; FISCAL POLICY; GERMANY (CENTRAL EUROPE). FEDERAL REPUBLIC OF GERMANY; ITALIEN (SÜDEUROPA). REPUBLIK ITALIEN; DEUTSCHLAND (MITTELEUROPA). BUNDESREPUBLIK DEUTSCHLAND; ÖKONOMETRIE UND ÖKONOMETRISCHE MODELLE (OPERATIONS RESEARCH); ITALY (SOUTH EUROPE). REPUBLIC OF ITALY; VEREINIGTE STAATEN VON AMERIKA, USA (NORDAMERIKA); INFLATION; INTERNATIONALER VERGLEICH (GESICHTSPUNKT); Public Deficits; UNITED STATES OF AMERICA, USA (NORTH AMERICA)Organisational unit
02525 - KOF Konjunkturforschungsstelle / KOF Swiss Economic Institute
Related publications and datasets
Is previous version of: http://hdl.handle.net/20.500.11850/115089
Notes
See also: http://e-citations.ethbib.ethz.ch/view/pub:176904.More
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ETH Bibliography
yes
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