How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area

IMF Working Papers, June 5, 2020

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How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area

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Bibliographic details

• Authors: Nicoletta Batini, Alessandro Cantelmo, Giovanni Melina, Stefania Villa
• Published: June 5, 2020
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781513546087.001

Overview and purpose

• Authors: Nicoletta Batini, Alessandro Cantelmo, Giovanni Melina, Stefania Villa
• Date: June 5, 2020
• Objective: Build a model-based dynamic monetary and fiscal conditions index (DMFCI) and use it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018.
• Core approach: The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring financial intermediaries and long-term government debt.

Methodology

• Model features:
  • Dynamic monetary and fiscal conditions index (DMFCI)
  • Uses actual and simulated data from estimated models
  • Models include financial intermediaries and long-term government debt
• Coverage:
  • Geographic: Euro area (EA) aggregate and its three largest member countries
  • Time span: 2007-2018

Key findings and analysis

• Evolution of joint policy stance:
  • The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening.
  • Monetary policy was left to be the “only game in town” after 2013.
• Heterogeneity across countries:
  • Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
• Index characteristics:
  • The DMFCI is constructed from the relative impacts of monetary and fiscal policy on demand, derived from model simulations and empirical estimates.

Subjects and keywords

• Subject: Dynamic stochastic general equilibrium models, Econometric analysis, Expenditure, Financial crises, Fiscal policy, Fiscal stance
• Keywords: condition index, Dynamic stochastic general equilibrium models, evolution of Dmfcis, f DMFCI, Fiscal stance, Global, Policy shock, policy stance, shock process, WP

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