Heterogeneous macroeconomic effects of interplay in recent fiscal and monetary policies

Abstract In this paper, using panel data from 19 euro area countries over the period 2010–2022, we examine the nature of monetary and fiscal policies in the context of developments and changes in inflation, public debt, and mutual integration. Using a panel vector autoregressive model, impulse response functions and forecast error variance decomposition, we analyse the economic dynamics of countries that joined the euro area before and after 2004, and the study also examines differences in countries with high and low public debt. Our results highlight the negative inflationary pressures of fiscal deficits in both old and new member countries and the positive effects of quantitative easing in old member countries. We highlight the interplay and impact of fiscal and monetary policy and emphasize the interrelationship between fiscal discipline, debt sustainability and economic growth in the euro area, pointing to the need for up-to-date fiscal strategies that take into account the specific economic conditions for euro area countries’ debt levels.