MPRA | Munich Personal RePEc Archive, 30. June 2007

Autor: Rosaria Rita Canale,Pasquale Foresti, Ugo Marani and Oreste Napolitano Dipartimento di analisi dei processi socio-economici produttivi e territoriali. Facoltà di Economia. Università di Napoli "Federico II"

Central Banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.
(Mervyn King, Governor of the Bank of England)

The aim of this paper is to evaluate the robustness of the theory that claims restrictive effects of expansionary fiscal policy. It shows that such socalled "non-Keynesian effects" may arise from synchronous and opposite monetary policy interventions. The paper demonstrates this conclusion through a stylized model supported by an empirical investigation on ECB and FED reaction functions in which Central Banks consider deficit spending as an element that generates inflation expectations. Econometric analysis also shows that the ECB reacts asymmetrically to deficit spending variations while the FED has a linear reaction to this indicator.