How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area

76 Pages Posted: 23 Jul 2020

See all articles by Nicoletta Batini

Nicoletta Batini

International Monetary Fund (IMF)

Alessandro Cantelmo

Bank of Italy

Giovanni Melina

International Monetary Fund (IMF)

Stefania Villa

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2020

Abstract

This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the 'only game in town' after 2013. Individual countries' DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.

JEL Classification: E40, E5, E6, E01, E52, E62, G21, E63

Suggested Citation

Batini, Nicoletta and Cantelmo, Alessandro and Melina, Giovanni and Villa, Stefania, How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area (June 1, 2020). IMF Working Paper No. 20/86, Available at SSRN: https://ssrn.com/abstract=3652504

Nicoletta Batini (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Alessandro Cantelmo

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giovanni Melina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Stefania Villa

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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