Monetary-fiscal policy interactions under asset purchase programs: Some comparative evidence

Using a policy-oriented multivariate VECM approach and monthly data over the period of unconventional monetary policy, this paper presents the first evidence of both long-run and short-run dynamic interactions between unconventional monetary policy and fiscal policy under central banks' large-scale asset purchase programs for the United States and Japan. Empirical results show clear differences in monetary-fiscal policy interactions between the two countries. First, our findings suggest that fiscal policy acts as the leading indicator in the monetary-fiscal policy combination in the U. S., while monetary policy acts as the leading indicator in the monetary-fiscal policy combination in Japan. Second, the impact of the BOJ's government bond purchases on monetary stock is much smaller than that of the Fed's Treasury securities purchases, suggesting differences in the transmission mechanism of unconventional monetary policy in the two countries. Lastly, compared to the U. S., the monetary-fiscal policy combination in Japan has been found to have less impact on macroeconomic variables during the period of unconventional monetary policy. This evidence suggests that monetary policy and fiscal policy reinforce each other more in their effects on the macroeconomy in the U. S.