‘Some unpleasant fiscal arithmetic’: the role of monetary and fiscal policy in public debt dynamics since the 1970s

Shocks to monetary and fiscal policy have played a major role in public debt developments in the OECD countries since the mid-1970s. According to the applied VAR approach, these shocks, taken together, explained, on average, about half of the forecast error variation in the debt to GDP ratio, while the share of shocks to GDP growth was close to 30 percent. In contrast, shocks to inflation and the debt ratio itself played in most cases only a minor role. However, the inflation shocks were vital in initiating the public debt problems, as the increase in actual inflation, and particularly the persistence of high inflation expectations in the 1980s, led to a prolonged period of high real interest rates. Learning the implications of greater monetary discipline therefore gave rise to ‘some unpleasant fiscal arithmetic’ which aggravated debt problems. In most countries fiscal policy aimed at correcting the deterioration in fiscal balances, but the progress was in most cases slow and delayed. It is noticeable that public debt developments have been quite similar in both the United States and the euro area despite differences in fiscal policy and the role of the public sector. Shocks to GDP growth, inflation and monetary policy, which have been more similar in both continents, explain about two thirds of the forecast error variation of the debt to GDP ratio, while shocks to fiscal policy explain about 20 percent.public debt dynamics; fiscal policy; monetary policy; VAR models

Federal Reserve and the Eurosystem

This paper presents the main aspects of the monetary policy instruments and procedures of the Bank of Japan, the Federal Reserve and the Eurosyste

Housing Finance in the Euro Area.

This report analyses the main developments in housing finance in the euro area in the decade, covering the period from 1999 to 2007. It looks at mortgage indebtedness, various characteristics of loans for house purchase, the funding of such loans and the spreads between the interest rates on loans granted by banks and the interest rates banks had to pay on their funding, or the return they made on alternative investments. In addition, the report contains a comparison of key aspects of housing finance in the euro area with those in the United Kingdom and the United States. At the end, the report briefly discusses aspects of the transmission of monetary policy to the economy. JEL Classification: D14, E44, E5, G21, R21.bank competition, bank funding, bankruptcy, banks, cost of funding (of banks), cost of housing loans, debt service, ECB monetary policy, foreclosure, household debt, household survey, housing finance, insolvency, loan maturity, loan-to-value ratio, monetary policy transmission, mortgage, mortgage covered bond, mortgage equity withdrawal, mortgage interest rate spread, redemption scheme, rental market, retail deposits, securitisation, taxation, US housing market crisis.