The Interactions between Fiscal Policy and Monetary Policy

Kirsanova, Tatiana; Stehn, Sven Jari; Vines, David

doi:10.1093/oxrep/gri031

Cited by 58 publications

(37 citation statements)

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“…Another strand of literature on fiscal policy in DSGE models has tended to focus on the cyclical impact rather than debt feedback (as, for example, also in, Taylor, 2000, Auerbach, 2002, and Favero and Monacelli, 2005, while only recently, the discussion about simple stabilizing fiscal rules related to debt, their optimal design and, partly, their strategic interaction with monetary policy has been taken up (see e.g. Kirsanova and Wren-Lewis, 2007, Kirsanova et al 2005, and Fragetta and Kirsanova, 2007. Starting with Benigno and Woodford (2003), Schmitt-Grohé and Uribe (2007) or Linnemann and Schabert (2008), the studies discuss optimal fiscal policy (and the interaction with monetary policy) whenever fiscal authorities can commit to a certain policy.…”

Section: Related Literaturementioning

confidence: 99%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

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Abstract:In a New Keynesian DSGE model with non-Ricardian consumers, we show that automatic stabilization according to a countercyclical spending rule following the idea of the debt brake is well suited both to steer the economy and in terms of welfare. In particular, the adjustment account set up to record public deficits and surpluses serves well to keep the level of government debt stable. However, it is essential to design its feedback to government spending correctly, where discretionary lapses should be corrected faster than lapses due to estimation errors.Keywords: fiscal policy, debt brake, welfare, dsge.JEL classification: E 32, G 61, E 62. Non-technical summaryThe possibilities and limits of fiscal policy regarding economic stabilization have moved center stage lately, certainly also prompted by the current economic downturn. In this context, it is continuously stressed that it is necessary to assure sustainability of public finances and the confidence therein. This can be achieved not least by reliable consolidation after the crisis, and -at least in normal times -by rule-based budget requirements. For example, the International Monetary Fund recently identified a possible positive role for rule-based fiscal policy emphasizing that is must be sustainable and reliable if countercyclical fiscal policy is to unfold its desired effects. While in the 1970s, there seemed to be confidence in somewhat active discretionary fiscal policy, further developments have shown that rule-based actions are needed because of reasons revealed in the political economic literature. This insight is also the basis for the fiscal framework of the European (monetary) union.The focus of the present paper is on the analysis of a rule-based fiscal policy, in particular, the "debt brake", which is expected to be introduced in Germany soon and has already been implemented in Switzerland. The discussion about the introduction of the debt brake has to be seen in the context of European fiscal rules, namely the European Stability and Growth Pact (SGP). As a rule, the SGP demands roughly balanced budgets in structural terms, while letting the automatic stabilizers take effect. The corrective arm of the pact is called on particularly if the 3% deficit ceiling is violated. The 60% debt ceiling also plays a role. As German national budgetary rules have not been consistent with the European framework, and they were largely assessed as being inappropriate with a view to limiting the increase in public debt, this was the hour of birth of the "Förderalismuskommission II" (federalism reform commission), which recently agreed on a proposal for the DB.Similar to the SGP, the debt brake demands (almost) structurally balanced budgets and, thus, ties cyclically adjusted government spending (including interest on outstanding debt) to cyclically adjusted trend revenues raised by the government and, therefore, acts as an automatic stabilizer since the government finances some of its expenditures from deficits in "bad times" while accumulating surpluses...

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Section: Related Literaturementioning

confidence: 99%

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Mayer

Stähler

2011

Empirica

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“…Debelle and Fischer (1994) analyse a similar set up with state contingent decision rules. The papers closest to the present one are therefore Dixit and Lambertini (2003a), Hughes Hallett (2008) and Kirsanova et al (2005), which allow policy makers to have conflicting objectives, state contingent rules, uncommitted policies and the possibility of leadership by one player. They provide welfare and performance comparisons on the basis of certain numerical simulations; and find that leadership (fiscal leadership) can be superior-although this result does seem to depend on how expectations are formed (predetermined or endogenous); on the degree of fiscal restraint or commitment; and on the degree of conservatism at the Central Bank.…”

Section: Previous Literaturementioning

confidence: 99%

Debt targets and fiscal sustainability in an era of monetary independence

Hallett

2008

Int Econ Econ Policy

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“…Following Kirsanova et al (2006) and Reade (2011), the theoretical model underlying the specifications of our fiscal rules and our vector autoregressive (VAR) model can be seen as an augmented New Keynesian structural model (see Clarida, Galí and Gertler, 1999) that incorporates not only the usual IS curve, the Phillips curve and the Taylortype monetary policy rule, but also the government budget constraint and the fiscal policy rule. In detail, the theoretical model can be described as follows:…”

Section: The Theoretical Frameworkmentioning

confidence: 99%

Fiscal Regimes in Spain: A Markov-Switching Approach

Ricci-Risquete,

Ramajo,

Castro

2015

SSRN Journal

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Abstract:In this paper we study fiscal regime shifts for the Spanish Economy, using a new quarterly dataset of Spanish public finance variables for the period 1986-2012(De Castro et al., 2014, within a Markov-Switching framework. First, we estimate fiscal policy rules to characterize the behavior of Spanish fiscal policymakers and, second, we estimate a vector autoregressive model to analyze the effects of a shock to the primary deficit-to-GDP ratio on the Spanish economy. Our results indicate that fiscal policymakers do not seem to track the state of public finances and the evolution of economic activity in both identified regimes; however, they appear to focus on the level of extraordinary expenditure, the responsiveness to which is higher in the first regime than in the second one. Increases in the primary deficit do not succeed in stimulating economic activity; rather, unexpected upsurges in the primary deficit-to-GDP ratio harm economic activity (non-Keynesian effect) in the second regime, which prevails since the ratification of the Maastricht Treaty.

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The Interactions between Fiscal Policy and Monetary Policy

Cited by 58 publications

References 0 publications

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

The debt brake: business cycle and welfare consequences of Germany’s new fiscal policy rule

Debt targets and fiscal sustainability in an era of monetary independence

Fiscal Regimes in Spain: A Markov-Switching Approach

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