Monetary-Fiscal Policy Interactions in the Euro Area

Abstract

The last review of the ECB's monetary policy strategy in 2003 followed a period of predominantly upside risks to price stability. Experience following the 2008 financial crisis has focused renewed attention on the question of how monetary and fiscal policy should best interact, in particular in an environment of structurally low interest rates and persistent downside risks to price stability. This debate has been further intensified by the economic impact of the coronavirus (COVID-19) pandemic. In the euro area, the unique architecture of a monetary union consisting of sovereign Member States, with cross-country heterogeneities and weaknesses in its overall construction, poses important challenges.12 Tax policy may also substitute interest rate policy to change real interest rates (the cost of current consumption in terms of future consumption), even in the case of balanced budgets. See Feldstein (2002) and Correia et al. (2013).

Is there a nonlinear relationship between public investment and private investment? Evidence from 21 Organization for Economic Cooperation and Development countries

“…By dampening the effect of government debt on economic activity, the non-standard monetary policy gave rise to government spending that would otherwise have been impossible, which may have allowed for crowding-in type effects. Nevertheless, a monetary policy that keeps interest rates low may lead to decreased fiscal discipline, the low cost of public funding incentivizing governments to increase public spending (Debrun et al, 2021). As unconventional monetary policy has been introduced by several central banks to address the exhaustion of fiscal policy in their countries, it is expected to have influenced the response of private investors to public investment.…”

Global growth on life support? The contributions of fiscal and monetary policy since the global financial crisis

“…Monetary policy support therefore can help ensure economic stability during periods where fiscal consolidation is necessary and allow that a country retains a sound fiscal position. That emphasises the more general point that regular interactions between policymakers responsible for fiscal and monetary policies are thus desirable, including some policy coordination (see Debrun et al, 2021 for an in-depth assessment of monetary-fiscal policy interactions in the euro area).…”

The Euro Area Government Spending Multiplier in Demand‐ and Supply‐Driven Recessions

“…Two recent examples of aggressive fiscal stabilization policy in the EA are the European Economic Recovery Plan (EERP) and the NextGenerationEU (NGEU). Both initiatives include significant stimulus packages (Trabandt et al, 2010;Debrun et al, 2021). The EERP was a response to the global financial crisis (GFC), while the NGEU is the current response to the Covid-19 recession.…”