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

83 Pages Posted: 13 Oct 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: September 29, 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 monetary and fiscal policy stance in the euro area (EA) and 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 also featuring financial intermediaries and long-term government debt. The analysis highlights the short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left as 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 EA level, due to the different fiscal stances.

Keywords: policy stance, euro area, monetary policy, fiscal policy

JEL Classification: E4, E5, E6

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 (September 29, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1295, Available at SSRN: https://ssrn.com/abstract=3710121 or http://dx.doi.org/10.2139/ssrn.3710121

Nicoletta Batini

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 (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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