How Does Fiscal Policy Affect Monetary Policy in Emerging Market Countries?

BIS Working Paper No. 174

51 Pages Posted: 20 Sep 2007

See all articles by Edda Zoli

Edda Zoli

Bank for International Settlements (BIS)

Date Written: April 2005


This paper analyses how fiscal policy affects monetary policy in emerging economies. First, it conducts a test for fiscal dominance, and finds that the evidence points clearly to a regime of fiscal dominance in the case of Argentina and Brazil during the 1990s and early 2000s, while for the other countries in the sample the results are mixed. Next, the paper evaluates whether monetary policy accommodates fiscal policy, by assessing whether fiscal variables enter significantly in the central bank's reaction function. The findings indicate that in the emerging markets under consideration the conduct of monetary policy is not directly affected by changes in real primary balances. Then, the paper explores another mechanism through which fiscal policy could affect monetary policy in an emerging economy, by looking at the impact of fiscal policy on country premium and exchange rates. The empirical analysis is conducted through an event study, assessing the impact of news concerning fiscal variables and fiscal policy, on sovereign spread and exchange rate daily movements in Brazil, during the period surrounding the 2002 macroeconomic crisis. The results show that fiscal events have significantly influenced sovereign spreads and exchange rates in that period. Furthermore, fiscal policy actions appear to have contributed to movements in the exchange rates more than unanticipated monetary policy manoeuvres. The findings also suggest that, at that time, fiscal policy might have pushed the economy into an equilibrium in which increases in the policy intervention rate were likely to be associated with a depreciation, rather than an appreciation of the exchange rate.

Keywords: Monetary Policy, fiscal policy, joint analysis of fiscal and monetary policy

JEL Classification: E52, E62, E63

Suggested Citation

Zoli, Edda, How Does Fiscal Policy Affect Monetary Policy in Emerging Market Countries? (April 2005). BIS Working Paper No. 174, Available at SSRN: or

Edda Zoli (Contact Author)

Bank for International Settlements (BIS)

Centralbahnplatz 2
Basel, Basel-Stadt 4002

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