Expansionary fiscal policies have increased significantly following the subprime crisis in 2007, leading to fiscal dominance, where the monetary authority is forced to deviate from policy targets to accommodate fiscal policies. Meanwhile, peripheral economies are constantly influenced by monetary and fiscal conditions in centre economies, with the United States (U.S.) as the predominant force. In light of this development, this study employs panel regressions and panel VAR models to examine the potential international spillovers from U.S. fiscal dominance to the policy interest rates in Emerging Market Economies (EMEs) and Developed Economies (DEs). We introduce a new measurement of fiscal dominance using principal components analysis and extend the concept to an international perspective, as opposed to previous literature, which has examined fiscal dominance in a domestic environment. The results, along with the robustness checks, show that U.S. fiscal dominance negatively affects the policy rates in both EMEs and DEs, with a greater impact observed in EMEs. Moreover, a high degree of financial repression and a low degree of foreign investor appetite are associated with larger spillover effects from U.S. fiscal dominance. Our findings suggest that policymakers need to consider the effects of U.S. fiscal dominance when designing macroprudential policies. Policies should aim to boost foreign liability inflows and reduce financial repression to build resilience against spillover effects on policy rates from the U.S. fiscal dominance.
| Identifer | oai:union.ndltd.org:UPSALLA1/oai:DiVA.org:liu-204121 |
| Date | January 2024 |
| Creators | Widholm, Frida, Eldén, William |
| Publisher | Linköpings universitet, Nationalekonomi, Linköpings universitet, Filosofiska fakulteten |
| Source Sets | DiVA Archive at Upsalla University |
| Language | English |
| Detected Language | English |
| Type | Student thesis, info:eu-repo/semantics/bachelorThesis, text |
| Format | application/pdf |
| Rights | info:eu-repo/semantics/openAccess |
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