Macroeconomic impacts of monetary and fiscal policy in the euro area in times of shifting policies: A SVAR approach

• Published in: Finance research letters Vol. 64; p. 105406
• Main Authors: Rant, Vasja, Puc, Anja, Čok, Mitja, Verbič, Miroslav
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.06.2024
• Subjects: Covid-19; Euro area; Financial crises; Fiscal policy; Macroeconomic impact; Monetary policy; Policy shifts; SVAR model; Unconventional policy; Fiscal policy; E52; E63; Covid-19; H30; Macroeconomic impact; Policy shifts; Monetary policy; Unconventional policy; SVAR model; Financial crises; Euro area
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2024.105406

•We use a structural vector autoregressive (SVAR) approach to analyse the effects of monetary and fiscal policy shocks on euro area output and inflation from 2005 to 2022.•Three alternative indicators of monetary policy are considered as proxies for the monetary policy stance, capturing both conventional and unconventional measures: the shadow short rate, the M1 money aggregate, and the total assets of the Eurosystem.•We split the sample period into two subperiods, based on the announcement of the ECB's quantitative easing programme in October 2014, and compare the policy effects across different periods and instruments.•Fiscal policy shocks have more substantial and short-lived effects on output and inflation than monetary policy shocks.•Conventional monetary shocks are more effective in the first subperiod, whereas non-conventional monetary shocks are more effective in the second subperiod. This paper analyses the impacts of monetary and fiscal policy of the euro area on output and inflation between 2005 and 2022 using a structural vector autoregressive (SVAR) approach. We employ three alternative indicators of monetary policy, alongside government spending and revenue as fiscal variables to estimate the effects across different subperiods. The findings reveal that monetary policy tightening produces a negative and delayed effect on both output and inflation, with the effects differing across alternative monetary policy indicators in terms of duration and magnitude. A fiscal revenue shock is found to be inflationary, whereas a fiscal spending shock initially has a negative effect on growth that later turns positive, but is short-lived. The effects of fiscal policy shocks are more substantial than the effects of monetary policy shocks. The results also suggest that the effects may differ across subperiods, depending on the nature and intensity of the policy shifts.