Shared Problem, Shared Solution: Benefits from Fiscal-Monetary Interactions in the Euro Area
Year: 2023
Type: article
Abstract: This paper employs two established macroeconomic models to show that fiscal policy in the euro area can help monetary policy in reducing inflation. Specifically, a fiscal consolidation of 1 percent of GDP for two years and 0.5 percent in the third year across the euro area would ease the policy interest rate by 30-50 basis points relative to the baseline scenario, while lowering inflation. It would also put the public debt-to-GDP ratio on a downward path, with the output costs reversing after the second year. Additionally, a stronger fiscal contribution to the policy mix could mitigate financial fragmentation risks. In the current context of elevated inflation in all euro area economies, the findings suggest two key takeaways: first, synchronized fiscal and monetary policies offer gains even when monetary policy is unconstrained and, second, sharing the burden of lowering inflation through fiscal consolidation among euro area members is beneficial for union-wide inflation reduction, improving debt sustainability and inducing a lower policy rate path.
Source: IMF Working Paper
Authors: Robert Beyer, Rupa Duttagupta, Alexandra Fotiou, Keiko Honjo, Mark Horton, Zoltan Jakab, Vina Nguyen, Rafael Portillo, Jesper Lindé, Nujin Suphaphiphat, Li Zeng
Institution: International Monetary Fund
Language: English
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4385224728