Mitreska, Ana and Kadievska Vojnovic, Maja and Georgievska, Ljupka and Jovanovic, Branimir and Petkovska, Marija (2010): Did the Crisis Change it All? Evidence from Monetary and Fiscal Policy. Published in: National Bank of the Republic of Macedonia Working Paper (November 2010)
Download (471kB) | Preview
The recent financial and economic crisis has triggered bold and diverse policy responses to prevent further, sharper and prolonged adverse effects to the financial and the real sector. The measures for alleviating the cycle were a feature both of the advanced and the emerging and developing economies, albeit less pronounced in the latter. The bulk of extraordinary measures undertaken refers to providing monetary and fiscal stimulus, implying possible change within the monetary and the fiscal policy reaction function. Hence, in this study we estimate monetary and fiscal policy reaction function, on a sample of 61 advanced and emerging and developing countries, using panel techniques. Since the purpose is to assess the potential change in the reaction functions during the recent crisis, estimates are done for the period prior and during the crisis. More precisely, we have analyzed whether monetary and fiscal policies have been more focused on closing the output gap during the recent crisis vis-à-vis the period before the crisis. Our findings prove that the magnitude of the reaction has been much stronger during the crisis period. In addition to this key research question, the analysis investigates whether policy responses in the advanced economies have been stronger compared to the ones in developing economies. Advanced economies appear to have been much more aggressive in stabilizing output during crisis compared to their emerging and developing counterparts. Finally, the role of the constraints - the exchange rate regime, the initial conditions in context of external position (the current account balance and the level of external indebtedness), as well as the fiscal space (public debt) - is also explored. We find that the pegged exchange rate regime, the high current account and the high external indebtedness have constrained monetary authorities to respond to inflation and output during crisis, while there is mixed evidence for the constraining role of the high level of public debt to the fiscal policy reaction.
|Item Type:||MPRA Paper|
|Original Title:||Did the Crisis Change it All? Evidence from Monetary and Fiscal Policy|
|Keywords:||global crisis; monetary policy; fiscal policy; policy change; policy constraints; panel|
|Subjects:||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination
|Depositing User:||Branimir Jovanovic|
|Date Deposited:||07 Dec 2012 19:23|
|Last Modified:||27 May 2016 18:28|
Arellano, M. and O. Bover (1995), “Another look at the instrumental variables estimation of error component models”, Journal of Econometrics 68, 29–51.
Baltagi, Badi (2005), Econometric Analysis of Panel Data, 3rd edition, John Wiley & Sons. BIS (2009), BIS 79th Annual Report.
Borio C. and Nelson W. (2008), “Monetary Operations and the Financial Turmoil”, BIS Quarterly Review, March 2008.
Bunea-Bontas, Cristina Aurora and Petre, Mihaela Cosmina (2009), “Fiscal Policy during the current Crisis”, Munich Personal RePEc Archive.
Cottarelli C. and Vinals J. (2010), “A Strategy for Renormalizing Fiscal and Monetary Policies in Advanced Economies”, A paper presented at KDI/IMF Conference on Reconstructing the World Economy, February 25 2010, South Korea.
Fujita K., Ishi K. and Stone M. (2010), “Exiting from Monetary Crisis Intervention Measures – Background Paper” IMF.
Gerlach P. (2010), “The Dependence of the Financial System on Central Bank Government Support”, BIS Quarterly Review, March 2010.
IMF (2010), “Exiting from Crisis Intervention Policies”, Paper prepared by the Fiscal Affairs, Monetary and Capital Markets and Research Departments, approved by Blanchard O., Cottarelli C. and Vinals J. Ishi K., Stone M. and Yehoue E.B. (2009), “Unconventional Central Bank Measures for Emerging Economies”, IMF WP/09/226.
Hayakawa, Kazuhiko (2009), “First Difference or Forward Orthogonal Deviation - Which Transformation Should be Used in Dynamic Panel Data Models?: A Simulation Study'”', Economics Bulletin, Vol. 29 no.3 pp. 2008-2017.
Papademos L. (2009), A Speech given at the 37th Economics Conference “Beyond the Crisis: Economic Policy in a New Macroeconomic Environment”, organized by the OeNB, Vienna, May 14, 2009.