Is Monetary Policy Constrained by Fiscal Policy?
20 Pages Posted: 13 Apr 2013
Date Written: October 1, 2012
In this paper we analyse how fiscal policy has affected monetary policy in the emerging market economies (EMEs). We find that most EMEs have pursued countercyclical fiscal and monetary policy over the past decade, with little evidence of fiscal dominance, in contrast to earlier periods. Our results also suggest that stronger fiscal positions are weakly associated with lower equilibrium real interest rates, and smaller deficits with lower inflation. Overall, improvements in fiscal policy in EMEs appear to have increased the effectiveness of monetary policy.
Keywords: fiscal policy, monetary policy, Taylor rule
JEL Classification: E63, H63
Suggested Citation: Suggested Citation