Debt and stabilization policy: Evidence from a Euro Area FAVAR Academic Article uri icon


  • 2018 Elsevier B.V. The Euro Area poses a unique problem in evaluating policy: a currency union with a shared monetary policy and country-specific fiscal policy. Analysis can be further complicated if high levels of public debt affect the performance of stabilization policy. We construct a framework capable of handling these issues with an application to Euro Area data. In order to incorporate multiple macroeconomic series from each country but, simultaneously, treat country-specific fiscal policy, we develop a hierarchical factor-augmented VAR with zero restrictions on the loadings that yield country-level factors. Monetary policy, then, responds to area-wide conditions but fiscal policy responds only to its country-level conditions. We find that there is broad quantitative variation in different countries responses to area-wide monetary policy and both qualitative and quantitative variation in responses to country-specific fiscal policy. Moreover, we find that debt conditions do not diminish the effectiveness of policy in a significant manner, suggesting that any negative effects must come through other channels.

published proceedings


author list (cited authors)

  • Jackson, L. E., Owyang, M. T., & Zubairy, S.

citation count

  • 1

complete list of authors

  • Jackson, Laura E||Owyang, Michael T||Zubairy, Sarah

publication date

  • January 2018