On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates
Federal Reserve Bank of St. Louis
Working Papers
Debt and Stabilization Policy: Evidence from a Euro Area FAVAR
AbstractThe Euro-area poses a unique problem in evaluating policy: a currency union with a shared monetary policy and country-specific fiscal policy. Analysis can be further complicated if high levels of public debt affect the performance of stabilization policy. We construct a framework capable of handling these issues with an application to Euro-Area data. In order to incorporate multiple macroeconomic series from each country but, simultaneously, treat country-specific fiscal policy, we develop a hierarchical factor-augmented VAR with zero restrictions on the loadings that yield country-level factors. Monetary policy, then, responds to area-wide conditions but fiscal policy responds only to its country level conditions. We find that there is broad quantitative variation in different countries'' responses to area-wide monetary policy and both qualitative and quantitative variation in responses to country-specific fiscal policy. Moreover, we find that debt conditions do not diminish the effectiveness of policy in a significant manner, suggesting that any negative effects must come through other channels.
Cite this item
Laura E. Jackson & Michael T. Owyang & Sarah Zubairy, Debt and Stabilization Policy: Evidence from a Euro Area FAVAR, Federal Reserve Bank of St. Louis, Working Papers 2017-22, 27 Jul 2017, revised 13 Oct 2017.
JEL Classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
Keywords: Government spending; monetary policy; European Monetary Union; debt
This item with handle
RePEc:fip:fedlwp:2017-022 is also listed on
EconPapers and
IDEAS.
For corrections, contact Anna Oates ()