How does fiscal policy affect monetary policy in emerging market countries?
By: by Edda Zoli.
Contributors: Bank for International Settlements. Monetary and Economic Dept.
Series: BIS working papers,; no. 174; BIS working papers (Online) ;; no. 174.
Publisher: Bank for International Settlements
Published: 2005
Place of publication: Basel, Switzerland
Language: eng
Format: Electronic resource
Description: "This paper analyses how fiscal policy affects monetary policy in emerging economies. First, it conducts a test for fiscal dominance, and finds that the evidence points clearly to a regime of fiscal dominance in the case of Argentina and Brazil during the 1990s and early 2000s, while for the other  countries in the sample the results are mixed. Next, the paper evaluates whether monetary policy accommodates fiscal policy, by assessing whether fiscal variables enter significantly in the central bank's reaction function. The findings indicate that in the emerging markets under consideration the conduct of monetary policy is not directly affected by changes in real primary balances. Then, the  paper explores another mechanism through which fiscal policy could affect monetary policy in an emerging economy, by looking at the impact of fiscal policy on country premium and exchange rates. The empirical analysis is conducted through an event study, assessing the impact of news concerning fiscal variables and fiscal policy, on sovereign spread and exchange rate daily movements in Brazil, during the period surrounding the 2002 macroeconomic crisis. The results show that fiscal events have significantly influenced sovereign spreads and exchange rates in that period. Furthermore, fiscal policy actions appear to have contributed to movements in the exchange rates more than unanticipated monetary policy manoeuvres. The findings also suggest that, at that time, fiscal policy might have pushed the economy into an equilibrium in which increases in the policy intervention rate were likely to be associated with a depreciation, rather than an appreciation of the exchange rate."
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file (viewed on Apr. 28, 2005).
"Monetary and Economic Department."
"April 2005."
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.