Σύνοψη

CAN CENTRAL BANKS DO THE UNPLEASANT JOB THAT GOVERNMENTS SHOULD DO?

Vasiliki Dimakopoulou
Foundation for Economic and Industrial Research (IOBE), and Athens University of Economics and Business

George Economides
Athens University of Economics and Business, CESifo, and Hellenic Open University

Apostolis Philippopoulos
Athens University of Economics and Business, CESifo, Hellenic Observatory
at the LSE, and Hellenic Fiscal Council

Vanghelis Vassilatos
Athens University of Economics and Business

Abstract

We investigate what happens when the fiscal authorities do not react to rising public debt so that the unpleasant task of fiscal sustainability falls upon the Central Bank (CB). In particular, we explore whether the CB's bond purchases in the secondary market can restore stability and determinacy in an otherwise unstable economy. This is investigated in a dynamic general equilibrium model calibrated to the Euro Area (EA) and where monetary policy is conducted subject to the numerical rules of the Eurosystem (ES). We show that given the recent situation in the ES, and to the extent that a relatively big shock hits the economy, there is no room left for further quasi-fiscal actions by the ECB; there will be room only if the ES' rules are violated. We then search for policy mixes that can respect the ES's rules and show that debt-contingent fiscal and quantitative monetary policies can reinforce each other; this confirms the importance of policy complementarities.

JEL-classification: E5, E6, O5
Keywords: Central banking, Fiscal policy, Debt stabilization, Euro Area

Acknowledgements: We thank two anonymous referees for detailed and constructive comments. We also thank participants in the conference on "Rethinking Macroeconomic Policy in Times of Turmoil", held at Aegina, Greece, 19-20 June 2023; we particularly thank Refet Gurkaynak, Evi Pappa and Frank Smets for specific comments. We have also benefited from discussions with Harris Dellas, Jim Malley, Dimitris Papageorgiou and George Tavlas. Vasiliki Dimakopoulou and Apostolos Philippopoulos clarify that the views in this paper are not necessarily those of IOBE and the Hellenic Fiscal Council respectively. Apostolos Philippopoulos is grateful to the Bank of Greece for supporting his research on the monetary-fiscal policy nexus. Any errors are ours.

Apostolis Philippopoulos
Athens University of Economics and Business, CESifo, Hellenic Observatory
at the LSE, and Hellenic Fiscal Council
tel: +30-210-8203357
email: aphil@aueb.gr