Monetary/fiscal policy regimes in post-war Europe

Othman Bouabdallah, Pascal Jacquinot and Valeria Patella

No 2871, Working Paper Series from European Central Bank

Abstract: In most euro area countries, the monetary/fiscal policy mix is responsible for the changing history of debt and inflation facts. Using a Dynamic Stochastic General Equilibrium model with Markov-switching policy rules, we identify three distinct monetary/fiscal regimes in France and Italy: a Passive Monetary-Active Fiscal regime (PM/AF) before the late 80s/early 90s; an Active Monetary-Passive Fiscal regime (AM/PF) with central bank independence and EMU convergence; a third regime with policy rates at the effective lower bound combined with fiscal active behavior to sustain the recovery. Our simulations reveal that the PM/AF regime in France led to price volatility and debt stabilisation, while the AM/PF regime resulted in disinflation and rising debt trajectory. Meanwhile, Italy’s procyclical fiscal policy in downturns contributed to persisting imbalances, high aggregate volatility, and low growth. JEL Classification: E63, E62, E32, E52, C32

Keywords: debt; euro area; inflation; Markov-switching; Monetary-fiscal policy mix (search for similar items in EconPapers)
Date: 2023-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eec, nep-his, nep-mac and nep-mon
Note: 2679249
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Citations: View citations in EconPapers (1)

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