Monetary and Fiscal Policy Coordination During the Fiscal Dominance Regimes

Abstract This study evaluates the conduct of monetary and fiscal policies for the post-liberalization period 2005: Q1–2017: Q1 in India and explores the need for coordination. As quantifying the extent of coordination, mostly depends on the appropriate policy mix that responds effectively to different shocks, this study empirically examines the interaction between monetary and fiscal policy by using Vector Auto Regressions (VAR) and a Vector Error Correction Model (VECM). Further, this study discusses the Stackelberg interaction model with government leadership to know the strategic interaction between monetary and fiscal policy. The estimates show that an unexpected increase in the monetary policy effect: (i) has a contractionary impact on the economic growth; (ii) leads to a gradual decline in the inflation; (iii) tightens the liquidity conditions; and (iv) rise in the bond yields. On the other hand, an unexpected increase in the fiscal policy effect: (i) has a positive effect on GDP growth; (ii) has an initial decline, but a gradual rise in the inflation levels; and (iii) leads to falling bond yields. Monetary policy is found to be more responsive to fiscal policy effects. The results imply that there is a greater need for effective coordination between monetary and fiscal policy as a sufficient condition to achieve economic stability.JEL Classification: C32; E31; E52; E62; E63

THE MACROECONOMIC IMPACT OF MONETARY-FISCAL POLICY IN A “FISCAL DOMINANCE” WORLD

Macroeconomic Dynamics ◽

10.1017/s1365100518000408 ◽

2018 ◽

Vol 24 (3) ◽

pp. 670-707

Author(s):

Pengfei Jia

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Debt Maturity ◽

Costs And Benefits ◽

Government Bonds ◽

Inflation Volatility ◽

Fiscal Dominance ◽

Macroeconomic Impact ◽

This paper focuses on the question of what monetary and fiscal policy can do and should do in a “fiscal dominance” world. I first highlight that both “amplification” and “fiscal cushion” effects are always at work jointly in determining the evolution of inflation. I find the threshold of maturity of government bonds beyond which more aggressive monetary policy dampens inflation volatility is three quarters. In addition, I conduct welfare analysis to quantitatively evaluate the costs and benefits brought by long-term debt. My results show that the threshold of government debt maturity above which an aggressive monetary policy improves welfare is eight quarters. More importantly, I characterize optimal monetary and fiscal policy using simple and implementable rules. My results indicate an optimal monetary and fiscal combination calls for an aggressive response in both rules. Finally, I find that optimized simple monetary-fiscal rule is significantly welfare inferior to the Ramsey optimal policy.

Interaction between Monetary and Fiscal Policy: Empirical Evidence from India

PRAGATI Journal of Indian Economy ◽

10.17492/pragati.v3i2.7746 ◽

2017 ◽

Vol 3 (2) ◽

Author(s):

Arundhati Mallick ◽

Narayan Sethi

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Theoretic Approach ◽

Economic Stability ◽

Correction Model ◽

Vector Error Correction ◽

Vector Error ◽

Game Theoretic ◽

Game Theoretic Approach

Monetary policy and fiscal policy have their own perspective towards maintaining economic stability of the country. However, for a well- functioning economy, they need to work in coordination with each other. In this paper we are empirically examining the interaction between monetary and fiscal policy by using Vector Error Correction Model (VECM) for the period of April 2010 to March 2015. The study also discusses game theoretic approach to know about the strategic interaction between monetary and fiscal policy. The study uses change in gross fiscal deficit and output to represent fiscal policy and inflation and interest rate to represent the monetary policy. The results indicate that fiscal policy responds well to any changes in monetary policy but reverse is not taking place.

Theorizing About Post-Keynesian Economics in Australasa

The Oxford Handbook of Post-Keynesian Economics, Volume 2 ◽

10.1093/oxfordhb/9780195390759.013.0019 ◽

2013 ◽

pp. 411-435

Author(s):

Paul Dalziel ◽

J. W. Nevile

Keyword(s):

Higher Education ◽

Economic Growth ◽

Monetary Policy ◽

World War Ii ◽

Fiscal Policy ◽

Aggregate Demand ◽

World War ◽

Keynesian Economics ◽

Low Levels ◽

There was much in common in the development of post-Keynesian economics in Australia and New Zealand, but there were also many differences. Both countries shared a common heritage in higher education. In the first twenty-five years after World War II, both countries adopted broadly Keynesian policies and experienced very low levels of unemployment. Increasingly over these years more theorizing about macroeconomic policy had what now would be called a post-Keynesian content, but this label was not used till after the event. In both countries, apart from one important factor, the experience of actual monetary policy and theorizing about it were similar. Keynesian ideas were more rapidly adopted in Australia than in many other countries. Not surprisingly for a couple of decades after 1936, analysis of policy and its application was Keynesian rather than post-Keynesian, with fiscal policy playing the major role. The conduct of both monetary and fiscal policy depends on the theory of inflation. This chapter examines post-Keynesian economics in Australasia, focusing on aggregate demand, economic growth, and income distribution policy.

Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates

The American Economic Review ◽

10.1257/aer.104.10.3154 ◽

2014 ◽

Vol 104 (10) ◽

pp. 3154-3185 ◽

Cited By ~ 208

Author(s):

Eric T. Swanson ◽

John C. Williams

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Lower Bound ◽

Private Sector ◽

Interest Rates ◽

Zero Lower Bound ◽

Short Term ◽

Macroeconomic Models ◽

Effectiveness Of Monetary Policy

According to standard macroeconomic models, the zero lower bound greatly reduces the effectiveness of monetary policy and increases the efficacy of fiscal policy. However, private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current short-term rate. Put differently, longer-term yields matter. We show how to measure the zero bound's effects on yields of any maturity. Indeed, 1- and 2-year Treasury yields were surprisingly unconstrained throughout 2008 to 2010, suggesting that monetary and fiscal policy were about as effective as usual during this period. Only beginning in late 2011 did these yields become more constrained. (JEL E43, E52, E62)

Fiscal and monetary policy in new Keynesian DSGE models

10.12681/eadd/34992 ◽

2014 ◽

Author(s):

Πέτρος Βαρθαλίτης

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Open Economy ◽

Small Open Economy ◽

New Keynesian ◽

Dsge Models ◽

Dsge Model ◽

Keynesian Model ◽

Fiscal And Monetary Policy

This thesis is about monetary and fiscal policy in New Keynesian DSGE models. Chapter 2 presents the baseline New Keynesian DSGE model. Monetary policy is in the form of a simple interest rate Taylor-type policy rule, while fiscal policy is exogenous. Chapter 3 extends the model of Chapter 2 to include fiscal policy. Now, both monetary and fiscal policy are allowed to follow feedback rules. Chapter 4 sets up a New Keynesian model of a semi-small open economy with sovereign risk premia. Finally, Chapter 5 builds a New Keynesian DSGE model consisting of two heterogeneous countries participating in a monetary union.Throughout most of the thesis, policy is conducted via "simple", "implementable" and "optimized" feedback policy rules. Using such rules, the aim of policy is twofold: firslty, it aims to stabilize the economy when the latter is hit by shocks; secondly, it aims to improve the economy's resource allocation.

Correction of monetary policy under the influence of corona crisis and long-term factors

Ekonomìčna teorìâ ◽

10.15407/etet2021.02.065 ◽

2021 ◽

Vol 2021 (2) ◽

pp. 65-92

Author(s):

Tetiana Krychevska ◽

◽

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Global Financial Crisis ◽

Emerging Market ◽

Macroeconomic Policy ◽

Inflation Target ◽

Structural Problems ◽

Potential Gdp ◽

The article shows the modification of monetary policy and modification of its interaction with fiscal policy in response to the challenges of the global financial crisis and the corona crisis, as well as reveals potential macroeconomic policy adjustments in response to long-term structural changes in the global economy. The specificity of the global financial and economic crisis, which was caused by financial intermediaries, and the belief in markets efficiency led to the dominance of monetary instruments in combating this crisis. However, purely monetary stimulus does not solve structural problems, and, acting with a very low degree of targeting, but on a huge scale, leads to the debt accumulation and financial crises. The corona crisis forced to resort to budget incentives to ensure targeted support for people and businesses and provided an impetus to discuss the ways to make better use of fiscal policy capacity to increase potential GDP and reduce inequality. The following potential long-term adjustments of macroeconomic policy are revealed: 1) increasing the emphasis on the interests of employees; 2) increasing the inclusiveness of monetary and fiscal policy; 3) the growing role of fiscal policy as an instrument of macroeconomic stabilization; 4) revision of the theory of monetary and fiscal policy interaction; 5) revision of the pre-emptive approach to anti-inflation policy, which means the reaction of monetary policy to deviations of the inflation forecast from the target, and the emergence of alternatives: response to the actual achievement and maintenance the inflation target for some time and compensation for the previous deviations from the inflation target; 6) modification of the optimal anti-inflationary policy in response to demand-pull inflation and cost-push inflation; 7) adjustment of the monetary policy in response to rising inflation due to the exhaustion of long-standing global disinflationary forces that have been in effect since the 1980s; 8) more active monetary and fiscal stimulus in emerging market economies.

RELATIVE EFFECTIVENESS OF INDONESIAN POLICY CHOICES DURING FINANCIAL CRISIS

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v14i2.84 ◽

2012 ◽

Vol 14 (2) ◽

pp. 177-219 ◽

Cited By ~ 1

Author(s):

Tumpak Silalahi ◽

Tevy Chawwa

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Financial Crisis ◽

Global Financial Crisis ◽

Relative Effectiveness ◽

Government Expenditure ◽

Jel Classification ◽

Exit Strategy ◽

Economic Output ◽

The Impact

The objective of this paper is to review the impact of crisis and policy measures taken during the crisis, to evaluate the effectiveness of those measures and to analyze the exit strategy in Indonesia. The econometric model was used to evaluate the impact of monetary and fiscal policy to economic output using quarterly data from 1990 - 2010. The result shows that monetary and fiscal policies have significant impact to economic output. In the short run the changes in real GDP is significantly affected by changes in real monetary supply in the previous three quarter and real fiscal expenditures. The lesson learned from this research among other are that cooperation and coordination among the policy makers and the timely responses are very important in tackling the crisis; an effective conventional monetary policy in normal times may become less effective in a crisis thus unconventional monetary policy indeed necessary as timely policy response and the improvement for more timely disbursement of government expenditure is important to increase the effectiveness of this policy to stimulate economic output. Moreover, several Indonesian exit strategy and policies to face future challenges are very important to reach the ultimate objective of sustainable economic growth while maintaining macroeconomic stability. JEL Classification : E52, E62, E63Keywords: monetary policy, fiscal policy, financial sector policy, global financial crisis.

Stabilizing Expectations under Monetary and Fiscal Policy Coordination

SSRN Electronic Journal ◽

10.2139/ssrn.1264042 ◽

2008 ◽

Author(s):

Stefano Eusepi ◽

Bruce J. Preston

Keyword(s):

Fiscal Policy ◽

Policy Coordination ◽

Fiscal Policy Coordination

Optimal Monetary and Fiscal Policy in the EMU: Does Fiscal Policy Coordination Matter?

SSRN Electronic Journal ◽

10.2139/ssrn.1484602 ◽

2009 ◽

Cited By ~ 1

Author(s):

Chiara Forlati

Keyword(s):

Fiscal Policy ◽

Policy Coordination ◽

Fiscal Policy Coordination

Are proposed African monetary unions optimal currency areas? Real, monetary and fiscal policy convergence analysis

African Journal of Economic and Management Studies ◽

10.1108/ajems-02-2012-0010 ◽

2014 ◽

Vol 5 (1) ◽

pp. 9-29 ◽

Cited By ~ 34

Author(s):

Simplice Asongu

Keyword(s):

Monetary Policy ◽

Fiscal Policy ◽

Initial Conditions ◽

Institutional Characteristics ◽

Content Type ◽

Policy Convergence ◽

Country Differences ◽

Cross Country ◽

Policy Targets

Purpose – A spectre is hunting embryonic African monetary zones: the European Monetary Union crisis. The purpose of this paper is to assess real, monetary and fiscal policy convergence within the proposed WAM and EAM zones. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of central bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states. Design/methodology/approach – In the analysis: monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size; real sector policy targets economic performance in terms of GDP growth at macro and micro levels; while, fiscal policy targets debt-to-GDP and deficit-to-GDP ratios. A dynamic panel GMM estimation with data from different non-overlapping intervals is employed. The implied rate of convergence and the time required to achieve full (100 percent) convergence are then computed from the estimations. Findings – Findings suggest overwhelming lack of convergence: initial conditions for financial development are different across countries; fundamental characteristics as common monetary policy initiatives and IMF-backed financial reform programs are implemented differently across countries; there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones; absence of fiscal policy convergence and no potential for eliminating idiosyncratic fiscal shocks due to business cycle incoherence. Practical implications – As a policy implication, heterogeneous structural and institutional characteristics across countries are giving rise to different levels and patterns of financial intermediary development. Thus, member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of convergence in monetary, real and fiscal policies. This could be done by stringently monitoring the implementation of existing common initiatives and/or the adoption of new reforms programs. Originality/value – It is one of the few attempts to investigate the issue of convergence within the proposed WAM and EAM unions.