This paper leverages a novel survey among German senior government officials to
investigate fiscal responses to monetary policy shocks. Using randomized vignette
treatments, we present officials with scenarios of increased government interest costs
and analyze their expected fiscal adjustments. Our findings reveal that officials predominantly adjust fiscal policy by increasing debt and reducing spending, with tax
increases being the least favored option. Moreover, they prefer adjusting multiple
fiscal instruments simultaneously rather than changing a single instrument. In a
back-of-the-envelope calculation, we compute the macroeconomic impact of a monetary policy shock under a mixed fiscal policy adjustment.
Publication Date: August 24, 2024
Access the full article here: https://www.research-collection.ethz.ch/bitstream/handle/20.500.11850/691414/wp_520.pdf?sequence=1&isAllowed=y
