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Shared Problem, Shared Solution: Benefits from Fiscal-Monetary Interactions in the Euro Area
Author:
Robert C. M. Beyer https://isni.org/isni/0000000404811396 International Monetary Fund

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Rupa Duttagupta https://isni.org/isni/0000000404811396 International Monetary Fund

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Alexandra Fotiou https://isni.org/isni/0000000404811396 International Monetary Fund

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Ms. Keiko Honjo
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Mr. Mark A Horton
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Zoltan Jakab
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Vina Nguyen https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. Rafael A Portillo
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Jesper Lindé https://isni.org/isni/0000000404811396 International Monetary Fund

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Mrs. Nujin Suphaphiphat
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Mr. Li Zeng
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 149
Language:
English
Publication Date:
21 Jul 2023
DOI:
https://doi.org/10.5089/9798400249051.001
ISBN:
9798400249051
ISSN:
1018-5941
Pages:
27
Keywords:
Policy mix; monetary policy; fiscal policy; policy coordination; synchronized fiscal policy; inflation reduction; monetary policy interaction; fiscal policy in the euro area; Annex I. Policy synchronization; Fiscal consolidation; Inflation; Fiscal stance; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper employs two established macroeconomic models to show that fiscal policy in the euro area can help monetary policy in reducing inflation. Specifically, a fiscal consolidation of 1 percent of GDP for two years and 0.5 percent in the third year across the euro area would ease the policy interest rate by 30-50 basis points relative to the baseline scenario, while lowering inflation. It would also put the public debt-to-GDP ratio on a downward path, with the output costs reversing after the second year. Additionally, a stronger fiscal contribution to the policy mix could mitigate financial fragmentation risks. In the current context of elevated inflation in all euro area economies, the findings suggest two key takeaways: first, synchronized fiscal and monetary policies offer gains even when monetary policy is unconstrained and, second, sharing the burden of lowering inflation through fiscal consolidation among euro area members is beneficial for union-wide inflation reduction, improving debt sustainability and inducing a lower policy rate path.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund