Inflation Targeting, Fiscal Rules and the Policy Mix: Cross‐effects and Interactions

Abstract

International audienceWe examine how inflation targeting (IT) and fiscal rules (FR) affect inflation and fiscal performancein a large panel of countries during 1990–2009. In line with theory, both FR and IT appear to shapemonetary and fiscal outcomes. Significant cross-effects seem to exist as IT strengthens fiscalperformance, whereas the combination of FR and IT tends to be associated with more disciplinedmacroeconomic policies than if only one of these institutions operates. Our findings suggest that ITand FR affect the coordination of the policy mix, and point to potential benefits of reformingmacroeconomic frameworks in a holistic fashion

Inflation targeting as a shock absorber

“…A higher coefficient on inflation in the loss function of central banks enforces a sound fiscal position which, in turn, prevents from pro-cyclical public spending in the wake of large disasters. The existence of cross-effects between IT and fiscal policy was documented by Combes et al (2017). Our findings depict that they also shape the policy mix in response to large disaster shocks.…”

“…sensitivity analysis, we will therefore extensively control for other potential shock absorbers. In particular, we correct for the level of development and the quality of institutions, as there is evidence that IT is mostly matters for developing countries (Lin and Ye, 2007;Ball, 2010;Lin, 2010), for the exchange rate regime (Ramcharan, 2007), as well as for fiscal policies (Combes et al, 2017) and financial capacities. 8…”

“…Third, we correct for the behavior of fiscal policy and other financial capacities to provide assistance, as there is evidence that the introduction of IT might be particularly beneficial when combined with fiscal rules (Combes et al, 2017). In (17)-(20) we include as interactions the number of local, federal, and all fiscal rules 15 from the IMF's fiscal rules dataset , as well as the size of the government, respectively.…”

Approaches on the Vulnerability of Romania's Economy in Terms of Budget Deficit and Inflation in a Continuous Form

“…In order to build the interaction panel between tax rules and inflation, some researches (Combes et al, 2018) investigated the results of national fiscal performance for 20 years, identifying the coordinates of the financial policy mix for the potential benefits of macroeconomic reforms.…”

Inflation Targeting as a Shock Absorber

“…sensitivity analysis, we will therefore extensively control for other potential shock absorbers. In particular, we correct for the level of development and the quality of institutions, as there is evidence that IT is mostly matters for developing countries (Lin and Ye, 2007;Ball, 2010;Lin, 2010), for the exchange rate regime (Ramcharan, 2007), as well as for fiscal policies (Combes et al, 2017) and financial capacities. 8…”