FISCAL AND MONETARY POLICY INTERACTIONS: IMPACTS AND ECONOMIC IMPLICATIONS

Abstract

This paper analyses the impact of various macroeconomic shocks - including aggregate demand, supply, monetary policy, real exchange rate, and budget deficit deviation shocks - on Romania's economy using a VAR model with Bayesian inference. The study captures the period following the adoption of inflation targeting by the National Bank of Romania, emphasising the challenges posed by economic policy decisions in an uncertain environment. Simultaneously, monetary policy followed a restrictive approach to counter inflation, causing high interest rates that tightened credit access. This monetary-fiscal policy divergence highlighted the trade offs in economic stability. The results suggest that the monetary policy response was more effective than the fiscal policy response. Monetary policy measures contributed to the containment of inflationary dynamics while exerting only a moderate adverse effect on real economic activity. In contrast, the expansionary fiscal interventions appear to have amplified macroeconomic imbalances. These findings support the recommendation of adopting a medium-term fiscal consolidation strategy to ensure a sustainable reduction in the budget deficit.

Keywords

• macroeconomic shocks
• public debt and budget deficit
• var model - bayesian inference