Original scientific paper

Modelling Fiscal and Monetary Policy Interactions in Croatia Using Structural Vector Error Correction Model

Dario Rukelj ; Ministry of Finance of the Republic of Croatia

Abstract

This paper investigates the interactions of fiscal policy, monetary policy and economic activity in Croatia. It employs a structural VECM in the identification of permanent and transitory shocks using monthly data on government expenditures, money aggregate M1 and the index of economic activity. The cointegrating properties of the data provide two restrictions on the transitory nature of fiscal and monetary policy shocks. An additional identifying restriction is provided by the assumption on contemporaneous interactions of the two policies. Impulse response functions and variance decompositions are used to study the effects of identified structural shocks. The results imply that an aggregate supply shock has a statistically significant permanent effect on all three observed variables in the long-run; secondly, fiscal and monetary policy move in the opposite direction, which indicates that they have been used as substitutes; finally, an unambiguous conclusion on the impact of the two policies on economic activity in the short- and medium-run can not be reached.

Keywords

fiscal policy; monetary policy; cointegration; structural VEC model; permanent shocks; transitory shocks; impulse response functions; Croatia

Hrčak ID:

48264

URI

https://hrcak.srce.hr/48264

Publication date:

22.2.2010.

Article data in other languages: croatian

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