Nominal Anchors under Fiscal Dominance: Foreign-Rate Transmission and Monetary Policy in a Small Open Economy

External Inflation Exposure and Fiscal Policy Under the Dollar Peg: Evidence from GCC Economies

The six Gulf Cooperation Council (GCC) economies share a dollar peg and heavy hydrocarbon dependence, yet their inflation paths diverge sharply over time. Because the peg imports US monetary policy and forecloses nominal adjustment, GCC inflation plausibly reflects imported price pressure, oil revenue cycles working through fiscal capacity, and domestic real activity. We quantify the associations between these channels and headline inflation in country fixed-effects regressions estimated on an annual panel of the six economies over 1991–2023. Trading partner inflation is associated with domestic inflation with a contemporaneous, within-year coefficient of about 0.46—an association, not an identified causal effect, which strengthens to about 0.65 under country-specific, backward-looking trade weights—while an oil-orthogonal proxy for discretionary fiscal stance is negatively associated with inflation. Both results are stable in leave-one-country-out checks and are robust to lagged inflation; the external association holds under wild cluster bootstrap inference appropriate to six clusters, under Driscoll–Kraay inference robust to cross-sectional dependence, and in first-difference and distributed lag specifications, while two-stage bootstraps propagating the fiscal proxy’s construction uncertainty place the fiscal association at the margin of conventional significance. After the 2014 oil price collapse, the external association weakens and domestic activity and financial volatility carry the largest standardized weights. The cyclically adjusted fiscal residual—our methodological contribution—tracks published IMF non-oil balances more closely than the raw balance does and requires only an overall balance and an oil price.

Dynamic Simulation of Fiscal Consolidation: Do Rapid Adjustments Become Self-Defeating?

Cost of Debt Financing and Corporate Investment in the EU-27: Deleveraging and Profit Buffers Under Monetary Tightening

The sharp rise in nominal interest rates after 2022 constitutes a substantial test for European non-financial corporations after a prolonged period of exceptionally cheap debt. This paper examines how the cost of debt financing—proxied by the lagged, ex post real long-term sovereign yield, interpreted throughout as an indicator of economy-wide financing conditions rather than a direct corporate borrowing rate—is associated with the gross investment rate of non-financial corporations in the EU-27 over 2000–2025, using harmonised annual sector accounts and two-way fixed-effects panel models, interaction designs and local projections. Three findings emerge. First, the conditional association is stronger for the real than for the nominal cost of debt: a one percentage point increase in the lagged real yield is associated with a decline of roughly 0.3–0.4 percentage points in the investment rate, and a formal test does not reject treating the nominal yield and inflation as components of the real rate. Second, this association is not stable over time: it weakens markedly after 2020, and the weakening is robust to an alternative 2022 breakpoint and to wild cluster bootstrap inference. Third, direct tests with predetermined leverage and profit shares do not account for this weakening, so stronger corporate balance sheets—including the pronounced deleveraging from around 477% to around 226% of income—remain only one candidate explanation among several. The profit-share interaction is positive, but the evidence of attenuation is weak and specification-dependent: it is not statistically significant with the one-year-lagged measure and reaches only marginal significance under two alternative measures.

Fiscal Dominance and Monetary Policy Effectiveness in a Resource Dependent Economy: An Econometric Analysis of Algeria (2020 - 2025)

This article examines whether fiscal dominance attenuates monetary policy transmission in Algeria, a hydrocarbon dependent economy, during the period 2020-2025. The study combines a macro-structural overview for 2020-2025 with a monthly reduced form investigation for January 2022 to December 2024. Fiscal dominance is proxied by the ratio of net claims on government to broad money (M2), while monetary policy effectiveness is assessed through the response of monthly inflation to interbank conditions, monetary aggregates, and credit growth. Because the available monthly window yields only 25 usable observations, the econometric analysis is necessarily exploratory: standard unit root and cointegration tests lack sufficient power, and ordinary least squares (OLS) estimates must be interpreted as conditional correlations rather than as causal structural parameters. The baseline results reveal a weak and statistically insignificant interest rate channel, whereas credit growth exhibits a positive and significant association with inflation. In the interaction specification, the fiscal dominance coefficient is positive and marginally significant, but the interaction between fiscal dominance and the interbank rate does not attain conventional significance levels. Consequently, the hypothesized attenuation of the interest rate channel by fiscal dominance cannot be confirmed with the available data. A major omitted variable the parallel foreign exchange market premium, which is a well documented determinant of Algerian inflation likely biases the estimated coefficients. The article distinguishes between classical fiscal dominance (direct monetisation of deficits à la Sargent and Wallace) and fiscal procyclicality (hydrocarbon revenue volatility that generates automatic liquidity swings), noting that the net claims proxy captures the former while Algeria simultaneously exhibits the latter. The findings are consistent with the view that, in resource-dependent economies, large fiscal financing requirements are associated with constrained conventional monetary transmission, but the evidence should be treated as preliminary pending longer samples and the inclusion of exchange rate variables.

Fiscal policy and long-run inflation dynamics: evidence from a major emerging market economy*

Fiscal Reaction Functions, Snowball Effects and Structural Constraints in Japan, 1980–2023

This article re-examines sovereign debt sustainability within a modern macro-financial framework that distinguishes mechanical debt arithmetic from policy-driven fiscal behaviour. While a negative interest–growth differential ( r – g < 0) is a necessary condition for debt stabilization in the canonical debt identity, it is not sufficient when the fiscal policy operates under structurally persistent deficits. Using Japan over 1980–2023 as a long-horizon benchmark, the study combines conceptual insights with an accounting decomposition separating snowball effects from primary-balance contributions. Despite persistently favourable r – g differentials, Japan’s debt ratio rose steadily due to sustained primary deficits and crisis-related expansions. A Bohn-type fiscal reaction function shows a stabilizing but modest primary surplus response to rising debt, insufficient to halt long-run accumulation. The article also documents declining fiscal effectiveness as cyclical slack narrowed and supply constraints intensified. Overall, the findings emphasize institutional structure and macro-financial regimes over purely arithmetic interpretations of debt sustainability. JEL Classification: E44, E62, H62, H63, O47