Monetary policy surprises and fiscal sustainability: the case of the Euro Area

Ion a, Se ena; A onso, An ónio; Al es, José
A icle — Published Ve sion
Mone a y policy su p ises and iscal sus ainabili y: he
case o he Eu o A ea
Economic Change and Res uc u ing
P o ided in Coope a ion wi h:
Sp inge Na u e
Sugges ed Ci a ion: Ion a, Se ena; A onso, An ónio; Al es, José (2025) : Mone a y policy su p ises
and iscal sus ainabili y: he case o he Eu o A ea, Economic Change and Res uc u ing, ISSN
1574-0277, Sp inge US, New Yo k, NY, Vol. 58, Iss. 3,
h ps://doi.o g/10.1007/s10644-025-09881-4
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/323354
S anda d-Nu zungsbedingungen:
Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen
Zwecken und zum P i a geb auch gespeiche und kopie we den.
Sie dü en die Dokumen e nich ü ö en liche ode komme zielle
Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich
machen, e eiben ode ande wei ig nu zen.
So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen
(insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en,
gel en abweichend on diesen Nu zungsbedingungen die in de do
genann en Lizenz gewäh en Nu zungs ech e.
Te ms o use:
Documen s in EconS o may be sa ed and copied o you pe sonal
and schola ly pu poses.
You a e no o copy documen s o public o comme cial pu poses, o
exhibi he documen s publicly, o make hem publicly a ailable on he
in e ne , o o dis ibu e o o he wise use he documen s in public.
I he documen s ha e been made a ailable unde an Open Con en
Licence (especially C ea i e Commons Licences), you may exe cise
u he usage igh s as speci ied in he indica ed licence.
h p://c ea i ecommons.o g/licenses/by/4.0/
Vol.:(0123456789)
Economic Change and Res uc u ing (2025) 58:42
h ps://doi.o g/10.1007/s10644-025-09881-4
Mone a y policy su p ises and iscal sus ainabili y: hecase
o  heEu o A ea
Se enaIon a1· An ónioA onso2,3· JoséAl es2,3
Recei ed: 10 Oc obe 2024 / Accep ed: 8 Ap il 2025 / Published online: 13 May 2025
© The Au ho (s) 2025
Abs ac
We s udy he in e ac ion be ween mone a y and iscal policies in he Eu o A ea, in
pa icula he e ec o mone a y su p ise shocks on eal ou pu and he p ice le el
unde di e en iscal sus ainabili y egimes. We i s es ima e a ime- a ying Bohn
(Q J Econ 113:949–963, 1998) ule using he Schlich (2003) me hod. Then, we use
a nonlinea local p ojec ion model o he Eu o A ea (agg ega e da a), Ge many,
I aly, and Po ugal condi ional on he iscal egimes ob ained in he i s s ep. We
ind ha he e ec o mone a y shocks depends on he deg ee o iscal sus ainabili y
o each coun y. In he case o a mo e Rica dian egime, ou pu and p ices espond
o mone a y igh ening by con ac ing. Ins ead, in he less Rica dian egime, he
esponse is insigni ican o e en posi i e. Ou esul s show ha iscal sol ency is
impo an o he e ec i eness o mone a y policy. The esul s a e obus o di e en
speci ica ions and models.
Keywo ds Mone a y su p ises· Fiscal sus ainabili y· Local p ojec ion models·
Fiscal-mone a y policy mix· Eu o A ea· Ge many· I aly· Po ugal
JEL C32· E58· E62· E63
* Se ena Ion a
[email p o ec ed]
An ónio A onso
aa [email p o ec ed]
José Al es
jal[email p o ec ed]
1 Depa men o Finance, Bocconi Uni e si y, Milan, I aly
2 UECE – Resea ch Uni onComplexi y andEconomics, REM – Resea ch inEconomics
andMa hema ics, ISEG – Lisbon School o Economics andManagemen , Uni e sidade de
Lisboa, Lisbon, Po ugal
3 Cen e o Economic S udies andI o Ins i u e, Munich, Ge many
Economic Change and Res uc u ing (2025) 58:42
42 Page 2 o 20
1 In oduc ion
The e has been a ecu ing ongoing deba e abou he impo ance o he in e ac ion
be ween iscal and mone a y policy since no ably he Global and Financial C isis
(GFC) o 2008–2009. This deba e has in ensi ied wi h he pandemic c isis and
he consequen iscal and mone a y policy esponses. In addi ion, he geopoli ical
c isis o he pas wo yea s has igge ed an in la iona y dynamic ha is s ill
in place. Some s udies a ibu e i s pe sis ence no o he ene gy c isis bu o
demand and iscal ac o s (Bianchi and Melosi 2022; Coch ane 2022a, 2022b).
In pa icula , hey see oday’s in la ion as a consequence o he la ge pandemic
iscal packages, cen al banks’ accommoda i e mone a y policies, and agen s’
expec a ions abou he u u e conduc o go e nmen policy. While his a gumen
may hold in he USA, whe e iscal s imuli ha e likely ueled in la iona y
p essu es, he Eu o A ea p esen s a mo e complex case. In some ins ances,
iscal expansion has appea ed o mi iga e in la iona y p essu es, while in o he s,
i s e ec s ha e been less clea . This highligh s he impo ance o s udying he
in e ac ion be ween iscal policies and he Eu opean Cen al Bank’s mone a y
policy, especially wi hin he Eu o A ea’s unique ins i u ional amewo k,
cha ac e ized by a single mone a y au ho i y and mul iple iscal policymake s.
In his asymme ic se ing, iscal ules and ea ies aim o main ain a clea
sepa a ion be ween mone a y and iscal policies, based on he belie ha
mac oeconomic s abili y elies on an independen cen al bank ensu ing p ice
s abili y and iscal au ho i ies main aining sus ainable deb le els. Howe e ,
ecen de elopmen s, such as he Pandemic Eme gency Pu chase P og am (PEPP)
and he ac i a ion o he gene al escape clause o he S abili y and G ow h Pac
in Ma ch 2020, ha e challenged his amewo k, necessi a ing s onge policy
coo dina ion.
The changing e olu ion o economic policy coo dina ion is a opic ha has been
s udied ex ensi ely in he heo e ical li e a u e, bu less so in he empi ical one.
Fo example, he Fiscal Theo y o he P ice Le el (FTPL) shows he exis ence o
di e en policy coo dina ion schemes. The mone a y-dominan egime, in which
mone a y policy is ac i e and iscal policy is passi e (Rica dian iscal egime),
al e na es wi h he iscal-dominan egime, in which he go e nmen chooses
he p ima y budge balance independen ly o he public deb - o-GDP a io and
p ices adjus endogenously o sa is y he go e nmen budge cons ain . Hence,
i would be hen up o he go e nmen budge cons ain o play a key ole in
he de e mina ion o he p ice le el. Se e al s udies ha e deal wi h such opic,
no ably Sa gen and Wallace (1981), Leepe (1991), Sims (1994), Wood o d
(1995) and Coch ane (2001). In his amewo k, one policy’s e ec i eness on
mac oeconomic ou comes depends on he o he policy in place.
The main objec i e o his pape is o in es iga e he e ec i eness o Ja onciski
and Ka adi (2020)’s mone a y su p ises in he Eu o A ea, condi ional on di e en
deg ees o iscal sus ainabili y. Fi s , o dis inguish be ween high and low iscal
sus ainabili y egimes, we implemen he ime- a ying iscal eac ion unc ion
(Bohn 1998) using Schlich (2003)’s me hod. Second, we use he local p ojec ion
Economic Change and Res uc u ing (2025) 58:42 Page 3 o 20 42
me hod (Jo dà 2005) and compa e he esul s o he linea , h eshold and smoo h
ansi ion models. We use qua e ly da a o Eu o A ea (agg ega ed), Ge many,
I aly, and Po ugal. We choose hese coun ies in o de o co e coun ies wi h
di e en iscal cha ac e is ics.
The li e a u e ha has empi ically es ima ed he FTPL has mos ly looked only
a iscal ules o examined he conduc o mone a y policy sepa a ely om iscal
policy. Ou main con ibu ion is o look di ec ly a he e ec i eness o mone a y
policy unde di e en iscal sus ainabili y egimes. To he bes o ou knowledge,
his is he i s a emp in he li e a u e ha uses a ime- a ying iscal eac ion
unc ion (Bohn 1998) o dis inguish be ween mo e and less Rica dian pe iods.
Mo eo e , we un his es o he Eu o A ea, in o de o examine he dependence o
a Eu opean cen al bank’s policy on he iscal s ance o each membe coun y. This
is some hing unexplo ed in he li e a u e and p o ides a comp ehensi e iew o he
Fiscal Theo y wi hin an incomple e mone a y union such as he Eu opean one.
As ega ds ou esul s, we show ha he e ec o mone a y shocks indeed
depends on each coun y’s iscal sus ainabili y deg ee. The indings a e obus wi h
di e en speci ica ions and models.
This pape is o ganized as ollows. Sec ion2 e iews he li e a u e. Sec ion3
explains he empi ical s a egy. Sec ion 4 p o ides es ima ion esul s and ela ed
discussion. Sec ion5 concludes.
2 Rela ed li e a u e
This pape e e s o h ee s ands o li e a u e. The i s is ela ed o he Fiscal
Theo y o P ice Le el (FTPL) li e a u e. The seminal wo k on he ela ionship
be ween iscal policy and in la ion is by Sa gen and Wallace (1981). The au ho s
show how, unde ce ain assump ions (no ably when popula ion g ow h is lowe
han he in e es a e), he mone a y au ho i y loses con ol o e p ice s abili y and
is bound by he go e nmen ’s in e empo al budge . In pa icula , when iscal policy
“domina es” mone a y policy, de ici s a e no inanced solely by new bond sales, and
he mone a y au ho i y is o ced o c ea e money and ole a e addi ional in la ion
(e en i ini ially ies o con ol he g ow h a e on money).
As de ined by Leepe (1991), his scena io is also e e ed o as an ac i e iscal
policy and a passi e mone a y policy egime,1 whe e “passi e” s ands o he
policy ha does no eely and independen ly con ol i s policy a iable and iscal
ac i ism does no p e en an explosi e pa h o go e nmen deb . The la e policy
is cons ained by he ac ions o he ac i e au ho i y, which speci ies he policy and
uniquely de e mines he equilib ium p ice unc ion. A s able and unique equilib ium
solu ion equi es a combina ion o ac i e and passi e policies, co esponding o he
“ iscal dominance” o “mone a y dominance” egimes. O he ela ed con ibu ions
1 Wood o d (1995) also calls his egime a “Non-Rica dian” egime.
Economic Change and Res uc u ing (2025) 58:42
42 Page 4 o 20
can be a ibu ed o Sims (1994, 2011), Wood o d (1994), and Coch ane (1998,
2001, 2023).2
Bianchi and Ilu (2017), s udying he FTPL equilib ium in a Ma ko -swi ching
DSGE model, show how he e ec o a mone a y policy shock depends on he
egime in place: igh e mone a y policy causes in la ion o ise unde iscal
dominance and all unde mone a y dominance.
The second s and o he li e a u e conce ns empi ical s udies on iscal
sus ainabili y and he consequen de e mina ion o iscal egimes. The li e a u e
di ides empi ical es s in o a backwa d-looking app oach (Bohn 1998) and a
o wa d-looking app oach (Canzone i e al. 2001). Acco ding o he i s app oach,
iscal policy is sus ainable (o e en Rica dian/passi e) i i adjus s he p ima y
su plus o he inc ease in lagged deb . Acco ding o he o wa d-looking app oach,
policy is Rica dian i he shocks o he p ima y su plus lead o a educ ion in deb .
Mo eo e , ano he way o assess he deg ee o iscal sus ainabili y is based on
uni oo es s and he coin eg a ion s udy o he ela ionships be ween he wo sides
o he go e nmen budge (Hakkio and Rush 1991; Quin os 1995; A onso 2005).
The e is no consensus in he li e a u e ega ding he sus ainabili y ou comes
o he Eu o A ea. On he one hand, some s udies do no ind empi ical e idence
o Rica dian egimes; o example, Semmle and Zhang (2004) ind non-
Rica dian egimes in bo h F ance and Ge many. A onso (2005) inds a lack o
iscal sus ainabili y wi hin he EU-15 sample and calls i “unpleasan ” om a
policymake ’s poin o iew.3 A onso and Jalles (2017), who s udy 11 Eu opean
coun ies, show ha iscal policy has been sus ainable only in he cases o Belgium,
F ance, Ge many, and he Ne he lands. On he o he hand, a numbe o wo ks
show he exis ence o iscal Rica dian egimes in Eu ope (Fa e o 2002; C eel and
Bihan 2006; A onso 2008; A onso and Jalles 2017).4 Panje e al. (2020) s udy he
exis ence o Rica dian egimes in he Eu ozone using he A ea Wide Model iscal
da abase (Pa edes e al. 2014), aking in o accoun he s uc u al b eaks and show
how iscal sus ainabili y is ime- a ying. The au ho s ind no e idence in a o o
ei he egime o he pe iod be o e he Eu o Con e gence C i e ia, and a Rica dian
egime a e he ECC un il he Global Financial C isis, when iscal policy became
ac i e.
This la e idea o nonlinea i y is also ela ed o he b oade eme ging li e a u e
on MS me hodology (e.g., Da ig e al. 2006, and Bianchi and Melosi 2017, o
he US, and A onso and To ano 2013, o he EU). Hence, in his pape , we do
no examine he p esence o absence o iscal sus ainabili y, bu a he he e ec o
mone a y policy condi ional on his a ying deg ee o sus ainabili y.
2 I is impo an o men ion o he wo ks which ha e s udied he equilib ium wi hin MS-DSGE models,
ocusing on he unde lying heo e ical ela ionships such as Da ig e al. (2006), Leepe and Lei h (2016),
Bianchi and Melosi (2017).
3 The au ho does coin eg a ion es s o he annual sample pe iod 1970–2003.
4 The e is also a s and o li e a u e ha has deal wi h he impac ha Eu opean ea ies ha e had on he
deg ee o sus ainabili y: Bu i and Giudice (2002) and Galì and Pe o i (2003) among o he s.

Economic Change and Res uc u ing (2025) 58:42 Page 5 o 20 42
Finally, he hi d s and o he li e a u e ela es o empi ical s udies o he
in e ac ions be ween mone a y and iscal policies. Fo he EMU coun ies, Meli z
(2000) inds e idence o policy subs i u abili y, namely coo dina ed mac oeconomic
policy: an easie iscal policy leads o igh e mone a y policy and an easie
mone a y policy o igh e iscal policy. Musca elli e al. (2004) es ima e a VAR
o G7 coun ies wi h bo h iscal and mone a y policy ins umen s and show ha
policy in e dependence is asymme ic and di e s ac oss coun ies; howe e ,
complemen a i y seems o domina e subs i u abili y. Kliem e al. (2016a) es ima e
he low- equency ime- a ying ela ionship be ween iscal de ici s and in la ion
o he USA, and Kliem e al. (2016b) ex end he same analysis o Ge many and
I aly. Acco ding o he au ho s, he low- equency ela ionship be ween he iscal
s ance and in la ion is a ound ze o o pe iods o which na a i e accoun s assign an
independen cen al bank and a esponsible iscal au ho i y (e.g., when Paul Volcke
became chai man o he Fede al Rese e, and I aly joined he EMU).5 Ins ead,
he low- equency ela ionship is high whene e he na a i e accoun s poin o a
iscal au ho i y which did no s abilize i s ou s anding go e nmen deb oge he
wi h a cen al bank ha accommoda ed his beha io . De Luigi and Hube (2018),
h ough a Th eshold SVAR analysis, disco e ha he e ec o mone a y policy is
less p onounced in ‘high’ deb egimes han he ‘low’ ones, poin ing o he di e en
spending and in es men beha io o p i a e sec o agen s.
A onso and Gonçal es (2020) use a SVAR app oach o in es iga e on he e ec s
o iscal and mone a y policies, as well as hei in e ac ions wi h he USA and he
Eu o A ea; hey ind in bo h cases ha he policies ac as complemen s. Hülsewig
and Ro mann (2022) disco e ha he iscal balance imp o es in esponse o
mone a y policy su p ises ha b ing down yields on so e eign bonds. Kloos e man
e al. (2022) es ima e he e ec s o mone a y policy shocks ac oss di e en iscal
egimes h ough a panel smoo h ansi ion local p ojec ion model o en Eu o A ea
coun ies, whe e he iscal egimes a e cha ac e ized by he change in he cyclically
adjus ed p ima y balance. They show ha expansiona y (con ac iona y) mone a y
policy shocks lead o signi ican inc eases (dec eases) in in la ion and ou pu , bu
only when iscal policy is also expansiona y (con ac iona y). Reichlin e al. (2023)
s udy he iscal-mone a y policy mix in Eu o A ea, hei indings sugges ha
con en ional mone a y easing is accompanied by an expansiona y iscal policy, bu
uncon en ional mone a y easing is no .
Wha di e en ia es us om he abo e li e a u e is he dis inc ion we make
be ween iscal egimes. Ou iscal s ance indica es nei he an expansiona y/
es ic i e iscal policy (Kloos e man e al. 2022) no a low/high le el o public
deb (De Luigi and Hube 2018). We a e in e es ed in he sus ainabili y beha io
o he iscal au ho i y, and we es ima e i h ough a ime- a ying iscal ule a la
Bohn (1998). We belie e ha di iding he sample in o pe iods o mo e o less iscal
sol ency is an app op ia e me hod o bes es he FTPL empi ically.
5 This low- equency ela ionship be ween he iscal s ance and in la ion is he p ocedu e desc ibed in
Sa gen and Su ico (2011), based on Lucas (1980)’s eg ession.
Economic Change and Res uc u ing (2025) 58:42
42 Page 6 o 20
3 Me hodology, da a, andmone a y policy su p ises
We assess he impac o mone a y policy shocks on he le el o eal ou pu and
p ices. To do so, we use he Local P ojec ion me hodology (Jo dà 2005). The LPs
me hod o e s se e al ad an ages o e he adi ional SVAR app oach. Fi s , i is a
be e es ima o han he VAR when he la e is misspeci ied; second, i is much
easie o implemen because i is an OLS eg ession; and hi d, i is sui able o
nonlinea es ima ion, which is he ul ima e goal o his pape .6
We use qua e ly da a anging om 2003Q4 o 2021Q4 o he agg ega ed
Eu o A ea, and om 2001Q4 o 2021Q4 o Ge many, I aly, and Po ugal, and we
es ima e h ee models: (1) an uncondi ional linea model, (2) a nonlinea h eshold
model condi ional on he iscal s ance (Jo dà 2005), and (3) a condi ional smoo h
ansi ion model (Aue bach and Go odnichenko 2012).
We ha e chosen hese coun ies o speci ic easons. We s udy he Eu o A ea as
an agg ega e (i) because mone a y su p ises a e common o all coun ies, and (ii)
because we wan o ha e an o e all and summa ized iew o he agg ega e economic
and poli ical s uc u e o he Eu o A ea; u he mo e, we analyze he o he h ee
coun ies because o hei di e en cha ac e is ics, especially om a iscal poin
o iew. We belie e ha Ge many ep esen s a “co e” coun y, especially om a
iscal and inancial ma ke s poin o iew; I aly is an example o a coun y in he
“middle,” cha ac e ized by bo h high domes ic p oduc and some iscal imbalances;
and Po ugal is o be conside ed as a “pe iphe y” coun y.
To disc imina e be ween di e en iscal egimes and o pe o m ime- a ying
iscal eg ession, we ollow A onso and Jalles (2017) and A onso e al. (2025), and
we es ima e Bohn (1998)’s ule h ough Schlich (2003)’s me hod. The app oach
p oposed by Schlich (2003) has se e al ad an ages compa ed o o he me hods
o compu e ime- a ying coe icien s (TVC), such as olling windows. I uses all
obse a ions in he sample o es ima e he magni ude o spillo e in each pe iod,
which by cons uc ion is no possible in he olling windows app oach. In addi ion,
changes in he size o es ima ed TVC in a gi en yea come om inno a ions in he
same yea , a he han om shocks occu ing in neighbo ing yea s; i e lec s he ac
ha changes in policy a e slow and depend on he immedia e pas . Las ly, i educes
e e se causali y p oblems when he es ima ed TVC is used as an explana o y
a iable since i depends on he pas (A onso and Coelho, 2022).
Hence, we ollow a wo-s ep app oach. Fi s , we es ima e he ollowing ime-
a ying equa ion:
whe e
s
is he p ima y budge balance,
b −4
is he lagged public deb , he
ou pu gap −4
is he ou pu gap compu ed by he Hod ick-P esco il e .7 We ake
he lagged alue “-4” because he a iables a e qua e ly bu a he same ime
(1)
s =𝛼+𝛿b −4+𝜓ou pu gap −4+𝜀
6 Fo a discussion o he local p ojec ion me hod see Ramey (2016) o Kilian and Kim (2011).
7 We compu e i choosing 1600 as he lamda o he HP il e . We di ide he cyclical componen on i s
end, and we mul iply by 100.
Economic Change and Res uc u ing (2025) 58:42 Page 7 o 20 42
annualized. Fiscal a iables a e as a io o GDP. We disc imina e he pe iods
based on he a e age o he
𝛿
coe icien s, which indica e he magni ude o iscal
sol ency. When he coe icien is g ea e han he a e age, we a e in a mo e (high)
Rica dian egime; when i is less, we a e in a less (low) Rica dian egime. Second,
we cons uc he impulse esponse unc ions (IRF), es ima ing ou LP model.
As o he mone a y shocks, we ollow Ramey and Zubai y (2018), and we
inse an exogenous shock al eady iden i ied: he su p ises o Ja onciski and Ka adi
(2020). The au ho s de i e a mone a y policy shock by ocusing on he changes
in he Eu o S oxx 50 index and he p ice di e ence be ween he EONIA in e es
swaps in he windows a ound p ess s a emen s and con e ences. The su p ises a e
iden i ied by imposing sign es ic ions. An expansiona y shock is assumed o aise
he s ock p ice.
The su p ises a e agg ega ed by summing he shocks wi hin he same qua e ,
and hen di ided by he s anda d de ia ion.
The i s model is an es ima ion o he ollowing equa ion:
whe e
y +h
is ou a iable o in e es , eal ou pu and in la ion,
𝛼h
deno es he
cons an ,
x
is he ec o o con ol a iables ha includes wo lags o he LHS
a iable and one lag o he mone a y policy shock, and
shock
is ou mone a y
su p ises shock.8 The coe icien
𝛽h
co esponds o he esponse o
y +h
o he shock
a ime . The impulse esponses a e he sequence o all es ima ed
𝛽h
.
The second model (Eq.3) is a nonlinea ex ension o he i s one and i sepa a es
da a in o he wo iscal egimes, using a bina y (dummy) a iable
I
, which is one
pe iod lagged o he shock.9 Hence, I is 0 when he sus ainabili y coe icien is
lowe han he a e age and 1 when i is highe :
The hi d model (Eq. 4) is a smoo h ansi ion model, which compu es s a e
p obabili ies wi h a logis ic unc ion, p ese ing he magni ude o he iscal s ance:
whe e
F
(z )=e
−𝛾(z
)
(1+e
−𝛾(z )
)
is ou logis ic unc ion,
z
is he s anda dized s a e
a iable,
𝛾
is he pa ame e which measu es how ab up ly he economy ansi ions
be ween he wo iscal s a e egimes; we se i o 1.5.10 When iscal sus ainabili y
(2)
y +h
=𝛼
h
+𝛽
h
shock
+𝜙x
+u
h
+h
,h=0, 1, …,H−
1
(3)
y +h
=
(
1−I
−1
)[𝛼
ah
+𝛽
ah
shock
+𝜙
a
x
]
+(I
−1
)
[
𝛼
bh
+𝛽
bh
shock
+𝜙
b
x
]
+u
h
+h.
(4)
y +h
=F
(
z
−1)
[𝛼
ah
+𝛽
ah
shock
+𝜙
a
x
]+(1−F
(
z
−1)
)
[
𝛼
bh
+𝛽
bh
shock
+𝜙
b
x
]
+u
h
+h
8 A u he es was done by en e ing 4 lags ins ead o 2 as ega ds he con ol a iables, and aking only
posi i e mone a y policy shocks (co esponding o mone a y igh ening); he esul s do no change.
9 We ollow he li e a u e (Ramey and Zubai y, 2018), and we inse he dummy in a lagged manne
because o a possible in e e ence be ween he s a e and he shock a ime .
10 Robus ness es s ha e been done changing
𝛾
, and i does no change he indings o he es ima es. This
esul s a e a ailable upon eques .
Economic Change and Res uc u ing (2025) 58:42
42 Page 8 o 20
imp o es, ou s a e a iable
z
inc eases and causes
F(
z
)
o go o 0. On he o he
case,
F(
z
)
ends owa d 1 when he iscal sus ainabili y ge s wo se.
Rega ding he iscal a iables, p ima y balances and go e nmen deb a e aken
om he EUROSTAT da ase and hen annualized. The endogenous a iables o he
LP models a e he loga i hmic le els o eal ou pu and he p ice index aken om
he FRED da ase . The shocks a e common o all he coun ies and a e aken om
Ja ociński’s si e (Fig.1). Mo e in o ma ion abou he da ase is in Appendix.
Figu e 2 illus a es he TVC-es ima ed magni ude o iscal sus ainabili y o
he coun ies s udied. The igu e highligh s se e al key poin s: (i) a common end
Fig. 1 ECB mone a y su p ises shocks. No es Mone a y su p ises a e aken om Ja ociński and Ka adi
(2020), qua e ly agg ega ed, and di ided by he s anda d de ia ion
Fig. 2 Time- a ying sus ainabili y (Bohn’s ule). No e Schlich (2003)’s ime- a ying coe icien s o
eg ession o p ima y balance on he lagged deb - o-GDP a io (Bohn 1998)
Economic Change and Res uc u ing (2025) 58:42 Page 15 o 20 42
Finally, u he obus ness analyses we e pe o med: i s , we checked o 4 lags ins ead
o 2; second, we included only he posi i e shocks ( hose o he mone a y con ac ion);
hi d, we made he same es ima es using ou pu and p ices in g ow h a es. The esul s a e
in Appendix.
5 Conclusions andpolicy implica ions
In ecen decades, he s udy o he in e ac ions be ween mone a y policy and iscal
policy has become inc easingly impo an . The li e a u e shows he exis ence o a
dependence be ween he wo policies o hei ela i e e ec i eness. Acco dingly,
we in es iga e he e ec o Ja ociński and Ka adi (2020) mone a y policy su p ises
on ou pu and p ice le els unde di e en deg ees o iscal sus ainabili y o he Eu o
A ea (agg ega e da a), Ge many, I aly, and Po ugal. We use qua e ly da a om
2003Q4 o 2021Q4 o he Eu o A ea and om 2001Q4 o 2021Q4 o he o he
coun ies.
Ou s udy consis s o wo pa s. Fi s , we es ima e a ime- a ying iscal eac ion unc-
ion (Bohn 1998), namely he esponses o he p ima y iscal balance o lagged deb . We
do his using he me hod o Schlich (2003). Nex , we es ima e h ee models: (1) a lin-
ea model, (2) a h eshold model condi ional on ou iscal s ance (Jo dà 2005), and (3)
a smoo h ansi ion model (Aue bach and Go odnichenko 2012). Ou iscal s ance ep-
esen s pe iods o “low” and “high” sus ainabili y, based on he a e age o ime- a ying
coe icien s indica ing he magni ude o iscal sol ency.
Acco ding o ou knowledge, his ela ionship be ween su p ises and ime- a ying
sus ainabili y has ne e been in es iga ed be o e.
Ou indings can be summa ized as ollows: (i) he uncondi ional e ec o
mone a y su p ise shocks has a ecessiona y e ec on he mac oeconomic
ou comes, comp essing ou pu , and p ice le el; (ii) when we inse he iscal
s ance, he mone a y e ec depends on he egime in place; speci ically, in he
“highe ” sus ainable egime ou pu and p ices end o espond mo e s ongly
o mone a y igh ening, in con as o he “lowe ” sus ainable egime; (iii) in he
mos Rica dian egime he ou pu con ac ion is e y p onounced compa ed o he
uncondi ioned linea model; (i ) o all he coun ies in he i esponsible egime,
we ind an inc ease in he p ice le el, in line wi h he so-called “S epping on a
ake” e ec (Sims 2011); ( ) when we disc imina e he iscal s ance h ough he
con empo aneous ela ionship be ween go e nmen e enues and expendi u es
(A onso 2005), he main esul s do no change and a e obus , e en i hey do no
manage o cap u e he iscal in la ion; ( i) he dependence o he e ec i eness o
mone a y policy on iscal sol ency is alid o Eu o A ea and all he s udy coun ies,
he e o e i does no depend on whe he a coun y is “co e” o “pe iphe y,” bu only
by he policy conduc o e ime.
Mo eo e , acco ding o ou es ima ion, he smoo h ansi ion model manages o i
be e in e ms o esul s and signi icance. This is due o he logis ic unc ion, which does
no lose any obse a ions and p ese es he magni ude o he iscal s ance.
Ou esul s ha e impo an policy implica ions. The mos impo an one is
ela ed o he Eu opean Cen al Bank’s abili y o con ol in la ion. Acco ding o

Economic Change and Res uc u ing (2025) 58:42
42 Page 16 o 20
ou idea, he ECB’s e ec i eness depends s ongly on he ype o iscal policy
pu sued by each membe s a e, in pa icula , whe he he single iscal au ho i y is
pu suing a pa h o iscal sus ainabili y o no .
The la e sugges ion is in line wi h he FTPL, and wi h Coch ane (2022a,
2022b), who s a es “… Mone a y policy is impo an , as a simplis ic eading
o “ iscal heo y” migh no ecognize, bu iscal policy also c ea es in la ion
ha mone a y policy canno ully con ol, as a simplis ic eading o he dic um
“in la ion is always and e e ywhe e a mone a y phenomenon” migh deny…”.
Appendix
Da a sou ce
Coun ies: Eu o A ea 20; Ge many; I aly; Po ugal
• P ima y Balance on GDP. Cons uc ed Va iable. To al Gene al Go e nmen
Expendi u e—To al Gene al Go e nmen Re enue + In e es on Deb .
Qua e ly da a. Annualized and exp essed as a pe cen age o GDP. Da a
Sou ce: EUROSTAT.
• Public Deb on GDP. Cons uc ed Va iable. Qua e ly Da a. The a io o
cumula i e Deb Qua e o e Nominal GDP Yea . Da a Sou ce: EUROSTAT.
• To al Gene al Go e nmen Re enue on GDP. Cons uc ed Va iable. Qua e ly
Da a. The Ra io o To al Gene al Go e nmen Re enue (Annualized) o e
Nominal GDP Yea . Da a Sou ce: EUROSTAT.
• To al Gene al Go e nmen Expendi u e on GDP. Cons uc ed Va iable.
Qua e ly Da a. The Ra io o To al Gene al Go e nmen Expendi u e
(Annualized) o e Nominal GDP Yea . Da a Sou ce: EUROSTAT.
• Mone a y Su p ises. Ja onciski and Ka adi (2020). Shock agg ega ed qua e ly,
h ough he sum o he mon hly shocks. Di ided by hei S anda d De ia ion.
• P ice Index. Ha monized Index o Consume P ices: All I ems. Index
2015 = 100, Qua e ly. Seasonally Adjus ed by Census-X13 (R So wa e).
Va iable aken in na u al loga i hm. Da a Sou ce: FRED.
• Real G oss Domes ic P oduc . Millions o Chained 2010 Eu os, Qua e ly,
Seasonally Adjus ed. Va iable aken in na u al loga i hm. Da a Sou ce: FRED.
• HCPI G ow h. All I ems. Index 2015 = 100, Qua e ly. Seasonally Adjus ed by
Census-X13 (R So wa e). Da a Sou ce: FRED.
• Real Ou pu G ow h. Millions o Chained 2010 Eu os, Qua e ly, Seasonally
Adjus ed. Da a Sou ce: FRED.
Only posi i e su p ises shock (mone a y igh ening)
The nex igu es show he esul s o he model in which he mone a y su p ises
a e posi i e, indica ing an e en sha pe mone a y igh ening han in he baseline
Economic Change and Res uc u ing (2025) 58:42 Page 17 o 20 42
model. O e all, he esul s no only con i m hose o he p e ious model (wi h all
shocks), bu also accen ua e e en mo e he ecessiona y e ec on he economy in
he less Rica dian egime. Mo eo e , in his speci ica ion, we a e able o cap u e he
dynamics o he weal h e ec h ough he pa e n o ou pu which inc eases in he
less sus ainable egime o I aly and Ge many (smoo h ansi ion model).
See Figs. 12, 13, 14 and 15
Fig. 12 Eu o A ea esul s (2003Q4–2021Q4), Bohn’s ule. Only posi i e su p ises. No e The IRFs indi-
ca e he esponses o eal ou pu and he p ice le el o mone a y policy su p ises, o he 12-qua e
o ecas ho izon. The g ay bands indica e he 90 pe cen con idence in e al. The linea model is no
condi ional on he new iscal s ance, while he second and hi d models ep esen he dummy/ h eshold
app oach and he smoo h ansi ion model, espec i ely
Fig. 13 Ge many esul s (2001Q4–2021Q4), Bohn’s ule. Only posi i e su p ises. No e The IRFs indi-
ca e he esponses o eal ou pu and he p ice le el o mone a y policy su p ises, o he 12-qua e
o ecas ho izon. The g ay bands indica e he 90 pe cen con idence in e al. The linea model is no
condi ional on he new iscal s ance, while he second and hi d models ep esen he dummy/ h eshold
app oach and he smoo h ansi ion model, espec i ely
Fig. 14 I aly esul s (2001Q4–2021Q4), Bohn’s ule. Only posi i e su p ises. No e The IRFs indica e he
esponses o eal ou pu and he p ice le el o mone a y policy su p ises, o he 12-qua e o ecas ho i-
zon. The g ay bands indica e he 90 pe cen con idence in e al. The linea model is no condi ional on
he new iscal s ance, while he second and hi d models ep esen he dummy/ h eshold app oach and
he smoo h ansi ion model, espec i ely
Economic Change and Res uc u ing (2025) 58:42
42 Page 18 o 20
Acknowlegdemen We hank he edi o and wo anonynous e e ees o e y use ul sugges ions. The
au ho s acknowledge inancial suppo om FCT – Fundação pa a a Ciência e Tecnologia (Po ugal),
na ional unding h ough esea ch g an UIDB/05069/2020. The opinions exp essed he ein a e hose o
he au ho s and do no necessa ily e lec hose o he au ho s’ employe s. The au ho s decla e ha hey
ha e no con lic s o in e es , inancial o o he wise, ha could ha e in luenced he esea ch and indings
p esen ed in his pape . Any emaining e o s o omissions a e solely he esponsibili y o he au ho s.
Funding Open access unding p o ided by Uni e si à Comme ciale Luigi Bocconi wi hin he CRUI-
CARE Ag eemen .
Open Access This a icle is licensed unde a C ea i e Commons A ibu ion 4.0 In e na ional License,
which pe mi s use, sha ing, adap a ion, dis ibu ion and ep oduc ion in any medium o o ma , as long
as you gi e app op ia e c edi o he o iginal au ho (s) and he sou ce, p o ide a link o he C ea i e
Commons licence, and indica e i changes we e made. The images o o he hi d pa y ma e ial in his
a icle a e included in he a icle’s C ea i e Commons licence, unless indica ed o he wise in a c edi line
o he ma e ial. I ma e ial is no included in he a icle’s C ea i e Commons licence and you in ended
use is no pe mi ed by s a u o y egula ion o exceeds he pe mi ed use, you will need o ob ain pe mis-
sion di ec ly om he copy igh holde . To iew a copy o his licence, isi h p://c ea i ecommons.o g/
licenses/by/4.0/.
Re e ences
Aas ei KA, Na ik GJ, Sola S (2017) Economic unce ain y and he in luence o mone a y policy. J In
Money Financ 76:50–67
A onso A (2005) Fiscal sus ainabili y: he unpleasan Eu opean case. FinanzA chi 61(1):19. h ps:// doi.
o g/ 10. 1628/ 00152 21053 722532
A onso A (2008) Rica dian iscal egimes in he Eu opean Union. Empi ica 35(3):313–334
A onso A, Gonçal es L (2020) The policy mix in he US and EMU: E idence om a SVAR analysis.
No h Am J Econ Finance 51:100840
A onso A, Jalles JT (2017) Eu o A ea ime- a ying iscal sus ainabili y. In J Financ Econ 22(3):244–254
A onso A, Coelho J (2022) Twin De ici s h ough he Looking Glass: Time-Va ying Analysis in he Eu o
A ea. REM Wo king Pape , 0211-2022
A onso A, To ano P (2013) Fiscal egimes in he EU
A onso A, Al es J, Coelho JC (2023) De e minan s o he deg ee o iscal sus ainabili y
A onso A, Al es J, Ion a S (2025) Mone a y policy su p ises shocks unde di e en iscal egimes: a
panel analysis o he Eu o A ea. J In Money Finance 156:103341
Aue bach AJ, Go odnichenko Y (2012) Measu ing he ou pu esponses o iscal policy. Am Econ J Econ
Pol 4(2):1–27
Fig. 15 Po ugal esul s (2001Q4–2021Q4), Bohn’s ule. Only posi i e su p ises. No e The IRFs indica e
he esponses o eal ou pu and he p ice le el o mone a y policy su p ises, o he 12-qua e o ecas
ho izon. The g ay bands indica e he 90 pe cen con idence in e al. The linea model is no condi ional
on he new iscal s ance, while he second and hi d models ep esen he dummy/ h eshold app oach and
he smoo h ansi ion model, espec i ely
Economic Change and Res uc u ing (2025) 58:42 Page 19 o 20 42
Bianchi F, Melosi L (2022) In la ion as a iscal limi
Bianchi F, Ilu C (2017) Mone a y/ iscal policy mix and agen s’ belie s. Re Econ Dyn 26:113–139
Bianchi F, Melosi L (2017) Escaping he g ea ecession. Am Econ Re 107(4):1030–1058
Bohn H (1998) The beha io o US public deb and de ici s. Qua J Econ 113(3):949–963
Bohn H (2007) A e s a iona i y and coin eg a ion es ic ions eally necessa y o he in e empo al
budge cons ain ? J Mone Econ 54(7):1837–1847
Bu i M, Giudice G (2002) Maas ich ’s iscal ules a en: an assessmen . JCMS J Common Ma k S ud
40(5):823–848
Canzone i MB, Cumby RE, Diba BT (2001) Is he p ice le el de e mined by he needs o iscal sol ency?
Am Econ Re 91(5):1221–1238
Coch ane JH (1998) A ic ionless iew o US in la ion. NBER Mac oecon Annu 13:323–384
Coch ane JH (2001) Long- e m deb and op imal policy in he iscal heo y o he p ice le el. Econome -
ica 69(1):69–116
Coch ane JH (2022b) Fiscal his o ies. J Econ Pe spec 36(4):125–146
Coch ane JH (2023) The iscal heo y o he p ice le el. P ince on Uni e si y P ess, P ince on
Coch ane JH (2022a) Fiscal in la ion. Fo hcoming in Populism and he Fed, James Do n Ed., Ca o
Ins i u e
C eel J, Le Bihan H (2006) Using s uc u al balance da a o es he iscal heo y o he p ice le el: some
in e na ional e idence. J Mac oecon 28(2):338–360
Da ig T, Leepe EM, Galí J, Sims C (2006) Fluc ua ing mac o policies and he iscal heo y [wi h com-
men s and discussion]. NBER Mac oecon Annu 21:247–315
De Luigi C, Hube F (2018) Deb egimes and he e ec i eness o mone a y policy. J Econ Dyn Con ol
93:218–238
Fa e o CA (2002) How do Eu opean mone a y and iscal au ho i ies beha e?. A ailable a SSRN 323361
Galí J, Pe o i R (2003) Fiscal policy and mone a y in eg a ion in Eu ope. Econ Policy 18(37):533–572
Hakkio CS, Rush M (1991) Is he budge de ici “ oo la ge?” Econ Inq 29(3):429–445
Hülsewig O, Ro mann H (2022) Eu o a ea pe iphe y coun ies’ iscal policy and mone a y policy su -
p ises. Ox o d Bull Econ S a 84(3):544–568
Ja ociński M, Ka adi P (2020) Decons uc ing mone a y policy su p ises— he ole o in o ma ion
shocks. Am Econ J Mac oecon 12(2):1–43
Jo dà Ò (2005) Es ima ion and in e ence o impulse esponses by local p ojec ions. Am Econ Re
95(1):161–182
Kilian L, Kim YJ (2011) How eliable a e local p ojec ion es ima o s o impulse esponses? Re Econ
S a 93(4):1460–1466
Kliem M, K iwoluzky A, Sa e az S (2016a) On he low- equency ela ionship be ween public de ici s
and in la ion. J Appl Econome 31(3):566–583
Kliem M, K iwoluzky A, Sa e az S (2016b) Mone a y– iscal policy in e ac ion and iscal in la ion: a ale
o h ee coun ies. Eu Econ Re 88:158–184
Kloos e man R, Bonam D, an de Vee K (2022) The e ec s o mone a y policy ac oss iscal egimes
Leepe EM (1991) Equilib ia unde ‘ac i e’ and ‘passi e’ mone a y and iscal policies. J Mone Econ
27(1):129–147
Leepe EM, Lei h C (2016) Unde s anding in la ion as a join mone a y– iscal phenomenon. In: Hand-
book o mac oeconomics, ol 2. Else ie , pp 2305–2415
Lucas RE (1980) Two illus a ions o he quan i y heo y o money. Am Econ Re 70(5):1005–1014
Meli z J (2000) Some c oss-coun y e idence abou iscal policy beha io and consequences o EMU.
Depa men o Economics, F ase o Allande Ins i u e
Musca elli VA, Ti elli P, T ec oci C (2004) 10 Mone a y and iscal policy in e ac ions o e he cycle:
some empi ical e idence. Mone Policy Fisc Polic Labou Ma k, 256
Panje N, de Haan L, Jacobs JP (2020) Is iscal policy in he eu o a ea Rica dian? Empi ica 47:411–429
Pa edes J, Ped egal DJ, Pé ez JJ (2014) Fiscal policy analysis in he Eu o A ea: expanding he oolki . J
Policy Model 36(5):800–823
Quin os CE (1995) Sus ainabili y o he de ici p ocess wi h s uc u al shi s. J Bus Econ S a
13(4):409–417
Ramey VA (2016) Mac oeconomic shocks and hei p opaga ion. Handb Mac oecon 2:71–162
Ramey VA, Zubai y S (2018) Go e nmen spending mul iplie s in good imes and in bad: e idence om
US his o ical da a. J Poli Econ 126(2):850–901
Reichlin L, Ricco G, Ta bé M (2023) Mone a y– iscal c osswinds in he Eu opean Mone a y Union. Eu
Econ Re 151:104328
Economic Change and Res uc u ing (2025) 58:42
42 Page 20 o 20
Sa gen TJ, Su ico P (2011) Two illus a ions o he quan i y heo y o money: b eakdowns and e i als.
Am Econ Re 101(1):109–128
Sa gen TJ, Wallace N (1981) Some unpleasan mone a is a i hme ic. Fed Rese e Bank Minneap Q Re
5(3):1–17
Schlich E (2003) Es ima ing ime- a ying coe icien s wi h he VC p og am (No. 2003–6). Munich Dis-
cussion Pape
Semmle W, Zhang W (2004) Mone a y and iscal policy in e ac ions in he Eu o A ea. Empi ica
31:205–227
Sims CA (1994) A simple model o he s udy o he de e mina ion o he p ice le el and he in e ac ion
o mone a y and iscal policy. Econ Theo 4:381–399
Sims CA (2011) S epping on a ake: he ole o iscal policy in he in la ion o he 1970s. Eu Econ Re
55(1):48–56
Sme s F, Wou e s R (2003) An es ima ed dynamic s ochas ic gene al equilib ium model o he Eu o A ea.
J Eu Econ Assoc 1(5):1123–1175
Ten ey o S, Thwai es G (2016) Pushing on a s ing: US mone a y policy is less powe ul in ecessions.
Am Econ J Mac oecon 8(4):43–74
Wood o d M (1994) Mone a y policy and p ice le el de e minacy in a cash-in-ad ance economy. Econ
Theo 4:345–380
Wood o d M (1995) P ice-le el de e minacy wi hou con ol o a mone a y agg ega e. In: Ca negie-
Roches e con e ence se ies on public policy, ol 43. No h-Holland, pp 1–46
Publishe ’s No e Sp inge Na u e emains neu al wi h ega d o ju isdic ional claims in published maps
and ins i u ional a ilia ions.