ISEG - REM - Research in Economics and Mathematics
Abstract
We estimate a large number of alternative monetary policy reaction functions for the ECB in order to robustly
find if fiscal stance matters for the monetary policy conduct. We use GMM and SVAR methods to estimate
inflation-output reaction functions with and without a fiscal deficit indicator from 2001 until 2022 with the
thick-modelling approach. The results revealed that ECB actions have exhibited desirable stabilising monetary
policy properties and have generally been found to be consistent with the Taylor principle. Most importantly,
the projected euro area fiscal deficit usually is not statistically significant in explaining ECB monetary policy
stance. Nevertheless, when the fiscal deficit indicator is statistically significant, the sign of its coefficient is
always positive, implying that increasing deficits lead to a more restrictive monetary policy stance. These
findings speak against the “fiscal dominance” regime in the euro area where monetary policy is single and
fiscal policies are decentralised. The results remain qualitatively similar independent of the precise
specification of the GMM and SVAR models and if the sample period is shortened from 2012.info:eu-repo/semantics/publishedVersio