Euro Area Periphery Countries' Fiscal Policy and Monetary Policy Surprises*

Abstract

We estimate local projections to explore how fiscal policy in euro area periphery countries responds to monetary policy shocks that lower sovereign bond yields. In particular, we assess whether the disciplining effect of financial markets on public finances is undermined by the ability of monetary policy to affect the conditions of external funds. We find that the fiscal balance, on average, improves in response to monetary policy surprises that bring down yields on sovereign bonds.JEL Classification numbers: E52, E62, H62. *We are grateful to Francesco Zanetti, two anonymous referees, Peter Egger, Benjamin Born, Gerhard Illing, Stefan Pichler and Peter Zorn for valuable comments and helpful suggestions. We also thank the participants of the KOF research seminar and the LMU macroeconomic research seminar for fruitful discussions. The usual disclaimer applies.

Understanding Monetary Spillovers in Highly Integrated Regions: The Case of Europe*

“…We first examine spillovers from EA monetary policy by estimating a range of bilateral regressions employing the local projection method of Jòrda (2005), recently applied in the context of monetary policy in Hülsewig and Rottmann (2022). These simple regressions allow us to examine the direct effect of the monetary policy shock on a particular variable – excluding feedback from the remaining set of variables.…”

“…Since we use an external instrument to measure changes in the monetary policy stance, we do not have to make any further identification assumptions such as about the timing of shocks (recursive identification) or the behaviour of other macroeconomic variables (sign restrictions). For recent studies that use local projections coupled with high frequency identified measures of monetary policy, see Blot, Hubert, and Labondance (2020) who investigate the effects of monetary policy on equity and housing prices and Hülsewig and Rottmann (2022) who assess the monetary and fiscal policy nexus. Following Gertler and Karadi (2015), we aggregate the daily target surprise series to monthly frequency by first creating a cumulative daily surprise series and second taking monthly averages of this series.…”

Macroprudential Capital Regulation and Fiscal Balances in the Euro Area

“…The increase in government bond holdings coincided with the period of tighter macroprudential capital regulation (see Figure 2 further below). Moreover, in several euro area countries, government debt as a share of GDP increased at that time (Hülsewig and Rottmann, 2022). Finally, a number of studies discusses the government's incentive to finance public expenditure by means of borrowing instead of raising taxes (Feldstein, 1985;Alesina and Perotti, 1995;Hamilton and Flavin, 1986;Roubini and Sachs, 1989;D'Erasmo et al, 2016, among others).…”

Mutual Influence of Fiscal and Monetary Policy in the Context of Ensuring Macro-Financial Stability of the State

“…The article (Wu H. et al, 2022) examines the interaction and optimal combination of fiscal and monetary policy, when the model includes the monopoly of state enterprises and financial repression. The authors of the scientific work (Hülsewig O. et al, 2022) evaluated local forecasts to investigate how fiscal policy in the eurozone periphery responds to monetary policy shocks that lower government bond yields. The practical value of research (Xiaoshan Chen et al, 2022) lies in the analysis of a model in which fiscal and monetary policies obey the rules of targeting of different political bodies with potentially different target functions.…”