Fiscal Consolidation and Unconventional Monetary Policy, an Awkward Combination. An empirical analysis of the impact of the fiscal policies in the eurozone on the effectiveness of the unconventional monetary policy pursued by the ECB between 2009 and 2018.
I investigate the impact of fiscal policy on the effectiveness of unconventional monetary policy conducted between 2009 and 2018. I do this firstly by estimating the effectiveness of unconventional monetary policy using a Structural Vector Autoregressive (SVAR) model and secondly by making this model of monetary policy conditional on fiscal policy in a Vector Autoregression with exogenous variables (VARX). Using both a recursive and sign restrictions identification strategy to identify unconventional monetary policy shocks, I find that unconventional monetary policy has been successful in raising output and inflation. When including fiscal policy as an exogenous variable, I find that fiscal policy, which was mostly consolidative during this time period, has halved the peak inflation response of unconventional monetary policy but has not affected the peak output response in an economically relevant way.
Faculteit der Managementwetenschappen