Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297311 
Year of Publication: 
2023
Series/Report no.: 
ECB Working Paper No. 2871
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
In most euro area countries, the monetary/fiscal policy mix is responsible for the changing history of debt and inflation facts. Using a Dynamic Stochastic General Equilibrium model with Markov-switching policy rules, we identify three distinct monetary/fiscal regimes in France and Italy: a Passive Monetary-Active Fiscal regime (PM/AF) before the late 80s/early 90s; an Active Monetary-Passive Fiscal regime (AM/PF) with central bank independence and EMU convergence; a third regime with policy rates at the effective lower bound combined with fiscal active behaviour to sustain the recovery. Our simulations reveal that the PM/AF regime in France led to price volatility and debt stabilisation, while the AM/PF regime resulted in disinflation and rising debt trajectory. Meanwhile, Italy's procyclical fiscal policy in downturns contributed to persisting imbalances, high aggregate volatility, and low growth.
Subjects: 
Monetary-Fiscal policy mix
euro area
Debt
Inflation
Markov-switching
JEL: 
E63
E62
E32
E52
C32
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-6248-3
Document Type: 
Working Paper

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