The objective of this study is to investigate the behaviour of monetary and fiscal authorities in the Euro area. Our main contribution is joint modelling of behaviour of the two authorities. Simultaneous modelling of fiscal and monetary reaction allows both a more precise estimation of the effects of each policy and an investigation of their reciprocal implications.
Moreover, such choice seems of particular relevance when one of the two authorities is subject to an intertemporal budget constraint which links present and future policy choices and therefore present policy choices and their effects on future macroeconomic conditions.
We conduct our investigation by specifying a small structural model containing three type of variables: macroeconomic indicators, fiscal policy indicators and monetary policy indicators. We consider four EMU countries: France, Germany, Italy and Spain.
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