Stability and performance of monetary and fiscal policies in the euro euro area

Abstract Following the importance of coordination of monetary and fiscal policies, the investigation of the causal relationship between public debt and budget deficit has a fundamental role in implementing suitable policies. This paper examines the fiscal policy sustainability and the impact of monetary policy on public debt management in Euro Area from 1980 to 2014. The analysis is based on error-correction models and cointegrated VAR modelling. The evidence does not let hear strong political coordination in Euro Area, and supports the idea that the monetary policy is more stabilizing in its influence on the economic activity than the budget policy. An important policy implication resulting from this study is that the fiscal rule generates a divergent dynamic of the public debt. Our results in this paper suggest the Keynesian effects of macroeconomic policies in the eurozone and concludes that there is a sort of complementarity between monetary and fiscal policies in some euro area countries insofar as a restrictive monetary policy (higher interest rates, interest) seems always accompanied by a restrictive fiscal policy (higher taxes or lower public spending) and vice versa. Thus, we consider that the debt has a positive effect on the budget deficit, which translates into behavior that destabilizes the debt. Moreover, fiscal policy is not sustainable in Belgium, Italy, Ireland and Greece. Furthermore, Fiscal policy is sustainable in France and Spain.