Cristián Cuevas, Universidad de los Andes

Paper: Monetary Policy and Fiscal Policy Cyclicality

Abstract: We study the evolution of macroeconomic policy cyclicality over the last 30 years for a large panel of 65 countries (advanced and emerging). We document that between and within countries, fiscal and monetary policy cyclicality are positively correlated over time (both are/become either more pro- or counter-cyclical), counter to the prediction of standard models. Moreover, within country variation depends on the aggregate shock composition, which acts through the cyclicality of sovereign spreads: where supply (demand) shocks dominate, spreads are more counter (pro)cyclical, which results in pro(counter)cyclical fiscal and monetary policy. We build a sovereign default model with nominal rigidities and supply and demand shocks, where fiscal and monetary interactions match these patterns.