On December 12, 2019, Fed in Print will introduce its new platform for discovering content. Please direct your questions to Anna Oates

Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of St. Louis
Working Papers
Debt and Stabilization Policy: Evidence from a Euro Area FAVAR
Laura E. Jackson
Michael T. Owyang
Sarah Zubairy
Abstract

The 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.


Download Full text
Download https://doi.org/10.20955/wp.2017.022
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.
More from this series
JEL Classification:
Subject headings:
Keywords: Government spending; monetary policy; European Monetary Union; debt
DOI: 10.20955/wp.2017.022
For corrections, contact Anna Oates ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal