Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We study the impact of the interaction between fiscal and monetary policy on the lowfrequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation. Terms of use: Documents in

Are fiscal deficits inflationary in Nigeria? New evidence from bounds testing to cointegration with structural breaks

“…The autonomy of monetary authorities and proactiveness of fiscal policy provides ample evidence of the relationship that might exist between budget deficit and price level. Kliem et al (2016) observe that the low-frequency relationship between fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy, and more pronounced in times of non-responsible fiscal policy and accommodative monetary authorities. Switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between fiscal stance and inflation (Kliem et al, 2016).…”

“…Results and evidence differ by country/region, analytical method employed, and budget deficit categorisation. For example, empirical studies of the United States (Aksoy and Melina, 2011;Klein and Linnemann, 2020) and of other industrial or developed countries (Sahan and Bektasoglu, 2010;Catão and Terrones, 2005;Kliem et al, 2016) have not yielded conclusive results on the deficit-inflation relationship. Meanwhile, empirical studies of developing countries, such as those of Samimi and Jamshidbaygi (2011), Kia (2010), Loungani and Swagel (2003), Ahmed andSuliman (2011), andJalil et al (2014), generally indicate that the inflationary effect of deficit financing is significant, and also observe a strong causality of fiscal deficits on inflation in high-inflation countries.…”

Understanding Inflation as a Joint Monetary–Fiscal Phenomenon

“…But other findings align closely to models with recurring Markov switching: a monetary contraction reduces inflation in the short run, but raises it over longer horizons; lump-sum tax changes always affect output and inflation. Kleim, Kriwoluzky, and Sarferaz (2015b) find some provocative reduced-form support for time-varying fiscal effects. Using U.S. data from 1900 to 2011, they discovered that the low-frequency correlation between inflation and the fiscal stance-defined as the ratio of primary deficits to government debt-is significantly positive most of the time until 1980 when it becomes zero.…”

“…Those authors extend their analysis in Kleim, Kriwoluzky, and Sarferaz (2015a) to include Germany and Italy and to interpret their findings with an estimated DSGE model. Germany never exhibits a significant low-frequency correlation between fiscal stance and inflation, while in Italy the correlation is positive until the Banca d' Italia gained its independence in the 1990s.…”

Tackling inflation in Nigeria: Monetary or fiscal policy? An empirical assessment of the effectiveness of the simultaneous implementation of the policies

“…Even though monetary contractions tighten the liquidity market and reduce real sector economic activities whereas, Keynesian effects are being experienced from the shocks in government expenditure. Kliem, Kriwoluzky and Sarferaz (2016) assessed the implication of monetary and fiscal policy interaction on Germany, the US, and Italy for a period 1965 -1999. The results of the simple regressions and that of the vector autoregressions show very-low-frequency effects, and efficiency of fiscal policy on inflation even combined with monetary policy during the period of the independent central bank.…”