On the Effects of Coordinated and Uncoordinated Fiscal and Monetary Policies: A Comparative Analysis

Giulia Alfonsi & Carlotta Miotto

Student thesis: Master thesis

Abstract

The latest financial crisis has stress-tested the effectiveness of the world’s most powerful countries’ economic policy making mechanisms. Starting in 2007, to fight the effects of the recession, strong and influential economies such as the United States, the Eurozone, Great Britain and Japan started implementing different kinds of monetary and fiscal strategies. In this regard, this work will compare the financial fruitfulness of having coordinated versus uncoordinated monetary and fiscal policies. The analysis revolves around the United States and the Eurozone, as the two most financially significant examples of the two policy frameworks examined. We argue that having coordinated policy mechanisms improves the effectiveness of the economic schemes implemented throughout a period of financial turbulences. The paper is divided into two main parts. The first one is a theoretical analysis of the matter, then followed by a more specific comparative analysis of the main financial indicators of United States and Canada versus the Eurozone during the years 2006-2009. The theoretical part purveys a description of the financial and economic frameworks of the three macro-areas analyzed in the second part and provides an overview of the performance and policies implemented during the latest Great Recession. The paper proceeds with a review of the most prominent literature on the matter, focusing on Niemann and Von Hagen (2008)'s model. Their results support the importance of coordination between monetary and fiscal authorities, when externalities between the two are present. The robustness of the presented paper is then assessed, and further similar models are presented. The theoretical part is then followed by an empirical part, where we implemented a synthetic control analysis, to compare the Eurozone states (treatment group) to a weighted average of economic indicators from US states and Canadian states (control group), over the period 2006-2009. Several variations, robustness and placebo tests have been implemented and have led to the conclusion that the performance of the Eurozone during the analyzed timeframe would have been enhanced, had the EU countries been part of an umbrella of coordinated monetary and fiscal authorities. We believe that our synthetic control analysis could serve as a base for a further research on the eventuality of coordinating monetary and fiscal policies within the Eurozone

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2016
Number of pages108
SupervisorsSvend E. Hougaard Jensen