Working Paper

Changes in the Response of Fiscal Policy to Monetary Policy in the EMU

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We study the evolution of the response of fiscal policy to monetary policy shocks
in the EMU in the light of two important events: the signing of the Maastricht treaty
in 1992 and the introduction of the EMU in 1999. Based on impulse responses from
a panel VAR, we find that fiscal and monetary policy acted neutrally toward each
other before the Maastricht Treaty; fiscal and monetary policy acted as substitutes
immediately after the Maastricht Treaty; and fiscal and monetary policy acted as
complements after the introduction of the EMU. These results holds for a set of 11
non-EMU countries as well, which indicates that the evolution of the fiscal response
to monetary shocks within the EMU has broadly mirrored global developments. One
example of such a global development is the global shift toward lower interest rates
and tighter fiscal policy during the 1990s.


Claire Boeing-Reicher
Sanchit Arora


Publication Date
JEL Classification
E52, E62, E65