Interactions Between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation
This 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...
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| Format: | Elektronisch E-Book |
| Sprache: | English |
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Paris
OECD Publishing
2006
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| Schriftenreihe: | OECD Economics Department Working Papers
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| Online-Zugang: | Volltext |
| Zusammenfassung: | This 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 "crisis" situation. After controlling for these factors, the paper finds strong econometric evidence 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. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued |
| Beschreibung: | 1 Online-Ressource (44 Seiten) 21 x 29.7cm |
| DOI: | 10.1787/414663503428 |
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| 520 | |a This 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 "crisis" situation. After controlling for these factors, the paper finds strong econometric evidence 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. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued | ||
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| spelling | Ahrend, Rudiger Verfasser aut Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation Rudiger Ahrend, Pietro Catte and Robert Price = Interactions entre la politique monétaire et budgétaire : L'effet des conditions monétaires sur les consolidations budgétaires / Rudiger Ahrend, Pietro Catte et Robert Price Interactions entre la politique monétaire et budgétaire Paris OECD Publishing 2006 1 Online-Ressource (44 Seiten) 21 x 29.7cm txt rdacontent c rdamedia cr rdacarrier OECD Economics Department Working Papers This 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 "crisis" situation. After controlling for these factors, the paper finds strong econometric evidence 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. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued Economics Catte, Pietro ctb Price, Robert ctb https://doi.org/10.1787/414663503428 Verlag kostenfrei Volltext |
| spellingShingle | Ahrend, Rudiger Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation Economics |
| title | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation |
| title_alt | Interactions entre la politique monétaire et budgétaire |
| title_auth | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation |
| title_exact_search | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation |
| title_exact_search_txtP | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation |
| title_full | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation Rudiger Ahrend, Pietro Catte and Robert Price = Interactions entre la politique monétaire et budgétaire : L'effet des conditions monétaires sur les consolidations budgétaires / Rudiger Ahrend, Pietro Catte et Robert Price |
| title_fullStr | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation Rudiger Ahrend, Pietro Catte and Robert Price = Interactions entre la politique monétaire et budgétaire : L'effet des conditions monétaires sur les consolidations budgétaires / Rudiger Ahrend, Pietro Catte et Robert Price |
| title_full_unstemmed | Interactions Between Monetary and Fiscal Policy How Monetary Conditions Affect Fiscal Consolidation Rudiger Ahrend, Pietro Catte and Robert Price = Interactions entre la politique monétaire et budgétaire : L'effet des conditions monétaires sur les consolidations budgétaires / Rudiger Ahrend, Pietro Catte et Robert Price |
| title_short | Interactions Between Monetary and Fiscal Policy |
| title_sort | interactions between monetary and fiscal policy how monetary conditions affect fiscal consolidation |
| title_sub | How Monetary Conditions Affect Fiscal Consolidation |
| topic | Economics |
| topic_facet | Economics |
| url | https://doi.org/10.1787/414663503428 |
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