2006
DOI: 10.2139/ssrn.1010655
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Interactions between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation

Abstract: Interactions between monetary and fiscal policy: how monetary conditions affect fiscal consolidationThis paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation "episodes", it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators --inflation, the exchange rate and unemployment --suggest a "c… Show more

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Cited by 64 publications
(62 citation statements)
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“…• 1% in 1 year (Ahrend et al, 2006;Guichard et al, 2007) • 1.5% in 1 year (European Commission, 2007;Barrios et al, 2010) Cumulative improvement of • 1% in 2 consecutive years with at least 0.5% in the first year (Ahrend et al, 2006) • 1.5% in 3 consecutive years with at least no deterioration in individual years (European Commission, 2007;Barrios et al, 2010) • 2% in 2 consecutive years with at least 0.25% reduction in the first year and overall reduction in debt-to-GDP ratio over the whole adjustment period (Heylen and Everaert, 2000) • 2% in 2 consecutive years with at least 0.25% reduction in the first year (Mierau et al, 2007) CAPB Individual improvement of (% cyclically adjusted GDP)…”
Section: Measuring Fiscal Consolidationmentioning
confidence: 99%
“…• 1% in 1 year (Ahrend et al, 2006;Guichard et al, 2007) • 1.5% in 1 year (European Commission, 2007;Barrios et al, 2010) Cumulative improvement of • 1% in 2 consecutive years with at least 0.5% in the first year (Ahrend et al, 2006) • 1.5% in 3 consecutive years with at least no deterioration in individual years (European Commission, 2007;Barrios et al, 2010) • 2% in 2 consecutive years with at least 0.25% reduction in the first year and overall reduction in debt-to-GDP ratio over the whole adjustment period (Heylen and Everaert, 2000) • 2% in 2 consecutive years with at least 0.25% reduction in the first year (Mierau et al, 2007) CAPB Individual improvement of (% cyclically adjusted GDP)…”
Section: Measuring Fiscal Consolidationmentioning
confidence: 99%
“…Ardagna (2004) argues that monetary policy and nominal interest rates play no major role in determining the effects of fiscal consolidations. On the other hand, Ahrend et al (2006) find that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. Other authors point out that a contractionary effect of fiscal consolidation can be avoided only if monetary policy is expansionary (IMF 2010a;Krugman 2010b).…”
Section: The Initial Debt Levelmentioning
confidence: 99%
“…In some countries there is evidence of budgetary responses actually turning into pro-cyclical budget action during the upturn -in euro-area countries in particular (Ahrend et al 2006a).…”
Section: Jpn Eu4mentioning
confidence: 99%
“…Primary spending, and in particular spending on transfers to individual and households, tends to rise more in response to macroeconomic shocks in countries with more proportional electoral systems (Milesi-Ferretti et al 2002). there are saving effects, there is less incentive for governments to use deficit finance to compensate for the cycle, since the effectiveness of reflationary action is undermined; Ahrend et al (2006a) show that the most prominent exponents of discretionary fiscal policy action have been Anglo-Saxon and Nordic countries, where 'Ricardian" effects are weakest (and in the case of the US reliance on automatic stabilisers also weakest). Elsewhere in continental European, economies have been more likely to rely on automatic stabilisers alone, which should, in principle be less vulnerable to the political business cycle.…”
mentioning
confidence: 99%
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