- Additional Authors
- Description
- 45 p.; 21 x 29.7cm.
- Summary
- This paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation "episodes", it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators -- inflation, the exchange rate and unemployment -- suggest a "crisis" situation. After controlling for these factors, the paper finds strong econometric evidence that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued.
- Series Statement
- OECD Economics Department Working Papers, 1815-1973 ; no.521
- Uniform Title
- OECD Economics Department Working Papers, no.521.
- Subject
- Economics
- LCCN
- 10.1787/414663503428
- OCLC
- oecd-lib-004039
- Author
Ahrend, Rudiger.
- Title
Interactions Between Monetary and Fiscal Policy [electronic resource]: How Monetary Conditions Affect Fiscal Consolidation / Rudiger Ahrend, Pietro Catte and Robert Price
- Imprint
Paris : OECD Publishing, 2006.
- Series
OECD Economics Department Working Papers, 1815-1973 ; no.521
OECD Economics Department Working Papers, 1815-1973 ; no.521.
- Connect to:
- Indexed Term
Economics
- Added Author
Catte, Pietro.
Price, Robert.
- Other Standard Identifier
10.1787/414663503428 doi