Fiscal and Monetary Nexus in Emerging Market Economies: How Does Debt Matter?
IMF Working Papers, August 1, 2006
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Bibliographic details
- Authors: Garima Vasishtha, Taimur Baig, Manmohan S. Kumar, Edda Zoli
- Published: August 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864441.001
Summary
- The paper examines two main aspects of the interaction between fiscal and monetary policy in emerging market economies.
- First aspect: explores the interest rate–inflation relationship in economies with different levels of external and domestic public debt using panel- and cross-section data.
- Second aspect: utilizes high-frequency data from Brazil, Turkey, and Poland to examine how market-determined variables react to economic news.
- Key summarized result: interest rate–inflation elasticity weakens with debt/GDP and external debt/GDP.
- Key summarized result from high-frequency analysis: 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.
Empirical Approach and Scope
- Cross-country empirical analysis:
- Uses panel- and cross-section data to study the interest rate–inflation relationship across economies with varying levels of external and domestic public debt.
- High-frequency case studies:
- Uses high-frequency data from Brazil, Turkey, and Poland to assess market reactions to economic news (budget news and monetary policy announcements).
Main Findings
- Interest rate–inflation elasticity:
- Weakens with debt/GDP.
- Weakens with external debt/GDP.
- Market reaction to news (high-frequency evidence for Brazil, Turkey, Poland):
- When vulnerabilities are high, budget news has the most significant impact on country spreads and interest rates.
- Under high vulnerabilities, the impact of monetary policy is weakened.