The Interaction between Monetary and Fiscal Policy: Insights from Two Business Cycles in Israel

Abstract

Comparing the two significant recessions Israel experienced over the last decade, we highlight the importance of sustained fiscal discipline and credible monetary policy during normal times for expanding the set of policy options available at a time of need. In the first recession Israel was forced to conduct a contractionary fiscal and monetary policy, whereas in the second one it was able to pursue an expansionary policy. The difference in the effect of the policy response between the two recessions is sizable: it exacerbated the first recession while it helped to moderate the second one.

Full publication: Fiscal Policy, Public Debt and Monetary Policy in Emerging Market Economies

Keywords: Fiscal policy, fiscal discipline, public debt, monetary policy, counter-cyclical policy, business cycles

JEL Classification: E52, E62, H6