<abstract xmlns="http://www.w3.org/1999/xhtml"><p> In this paper, we shed some light on the mutual interplay of economic policy and the financial stability objective. We contribute to the intense discussion regarding the influence of fiscal and monetary policy measures on the real economy and the financial sector. We apply a factor-augmented vector autoregression model to Czech macroeconomic data and model the policy interactions in a data-rich environment. Our findings can be summarized in three main points: First, loose economic policies (especially monetary policy) may translate into a more stable financial sector, albeit only in the short term. In the medium term, an expansion-focused mix of monetary and fiscal policy may contribute to systemic risk accumulation, by substantially increasing credit dynamics and house prices. Second, we find that fiscal and monetary policy impact the financial sector in differential magnitudes and time horizons. And third, we confirm that systemic risk materialization might cause significant output losses and deterioration of public finances, trigger deflationary pressures, and increase the debt service ratio. Overall, our findings provide some empirical support for countercyclical fiscal and monetary policies.</p></abstract>

In this paper, we shed some light on the mutual interplay of economic policy and the financial stability objective. We contribute to the intense discussion regarding the influence of fiscal and monetary policy measures on the real economy and the financial sector. We apply a factor-augmented vector autoregression model to Czech macroeconomic data and model the policy interactions in a data-rich environment. Our findings can be summarized in three main points: First, loose economic policies (especially monetary policy) may translate into a more stable financial sector, albeit only in the short term. In the medium term, an expansion-focused mix of monetary and fiscal policy may contribute to systemic risk accumulation, by substantially increasing credit dynamics and house prices. Second, we find that fiscal and monetary policy impact the financial sector in differential magnitudes and time horizons. And third, we confirm that systemic risk materialization might cause significant output losses and deterioration of public finances, trigger deflationary pressures, and increase the debt service ratio. Overall, our findings provide some empirical support for countercyclical fiscal and monetary policies.

Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

{"article-title":"Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment"}

In this paper, we shed some light on the mutual interplay of economic policy and the financial stability objective. We contribute to the intense discussion...

Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment

Published Online: Sep 11, 2018

Page range: 195 - 224

Received: May 20, 2018

Accepted: May 24, 2018

DOI: https://doi.org/10.2478/revecp-2018-0012

Keywords
financial stability, fiscal policy, macroprudential policy, monetary policy, interactions, policy mix

© 2018 Martin Hodula, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Fiscal-Monetary-Financial Stability Interactions in a Data-Rich Environment

Published Online: Sep 11, 2018

Page range: 195 - 224

Received: May 20, 2018

Accepted: May 24, 2018

DOI: https://doi.org/10.2478/revecp-2018-0012

Keywordsfinancial stability, fiscal policy, macroprudential policy, monetary policy, interactions, policy mix

© 2018 Martin Hodula, published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License.

Keywords
financial stability, fiscal policy, macroprudential policy, monetary policy, interactions, policy mix