Fiscal and Monetary Nexus in Emerging Market Economies: How Does Debt Matter?

43 Pages Posted: 23 Aug 2006

See all articles by Taimur Baig

Taimur Baig

International Monetary Fund (IMF)

Manmohan Kumar

International Monetary Fund (IMF) - Research Department

Garima Vasishtha

International Monetary Fund

Edda Zoli

International Monetary Fund (IMF)

Date Written: August 2006

Abstract

This paper examines two main aspects of the interaction between fiscal and monetary policy in emerging market economies. First, it explores the interest rate-inflation relationship in economies with different levels of external and domestic public debt using panel- and cross-section data. The results show that interest rate-inflation elasticity weakens with debt/GDP and external debt/GDP. Second, it utilizes high-frequency data from Brazil, Turkey, and Poland to examine how market-determined variables react to economic news. The results suggest that when vulnerabilities are high, budget news has the most significant impact on country spreads and interest rates, and the impact of monetary policy is weakened.

Keywords: Public Debt, Fiscal Policy, Monetary Policy

JEL Classification: H63, H30, E5

Suggested Citation

Baig, Taimur and Kumar, Manmohan and Vasishtha, Garima and Zoli, Edda, Fiscal and Monetary Nexus in Emerging Market Economies: How Does Debt Matter? (August 2006). IMF Working Paper No. 06/184, Available at SSRN: https://ssrn.com/abstract=926239

Taimur Baig (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
(202) 623-8790 (Phone)
(202) 244-4505 (Fax)

Manmohan Kumar

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7771 (Phone)
202-589-7771 (Fax)

Garima Vasishtha

International Monetary Fund ( email )

Edda Zoli

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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