How does fiscal policy affect monetary policy in emerging market countries?
Author InfoEdda Zoli Abstract 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 impac
