Monetary and Fiscal Policy Interaction in the Greece: A Cointegration Approach

Hounaida Daly and Mounir Smida

Recently, monetary authorities have increasingly focused on implementing policies to ensure price stability and strengthen central bank independence. Simultaneously, in the fiscal area, market development has allowed public debt managers to focus more on cost minimization. This « divorce » of monetary and debt management functions in no way lessens the need for effective coordination of monetary and fiscal policy if overall economic performance is to be optimized and maintained in the long term. This paper analyzes the interaction between monetary and fiscal policies in Greece from 1980 to 2012. The particular stance of monetary policy affects the capacity of the government to finance the budget deficit by changing the cost of debt service and limiting or expanding the available sources of financing. The evidence does not let hear strong political interactions in Greece, and supports the idea that the monetary policy is more stabilizing in its influence on the economic activity than the budget policy.

JEL Codes: E52, E58, E62 and E61

DOI : http://dx.doi.org/10.21102/irbrp.2016.03.121.01