Gordana Jevđović, Ivan Milenković

DOI Number
First page
Last page


The conventional macroeconomic paradigm is that monetary policy provides the nominal anchor for inflation expectations and that fiscal policy is disciplined in implementing credible and timely revenue-expenditure measures when debt rises, in order to ensure sustainability. In this scenario monetary policy is active, whereas fiscal policy is passive, which is referred to as monetary dominance. However, the proponents of the Fiscal Theory of the Price Level emphasize that another regime may be possible - the one of fiscal dominance. In this setup, primary balance follows some arbitrary path, not necessary compatible with the evolution of government debt, and monetary policy is faced with limited room for manoeuvre as it has no option but to adjust to fiscal developments. Following these theoretical foundations, the aim of this paper is to empirically ascertain the prevailing policy regime (monetary versus fiscal dominance) in five emerging European economies (Hungary, Romania, Bulgaria, Serbia and Macedonia). In line with expectations, results overwhelmingly suggest that monetary policy may have been subordinated to fiscal policy over the period of analysis in all economies under scrutiny and that fiscally-led regime prevailed.


Fiscal Theory of the Price Level, fiscal dominance, monetary dominance, emerging European economies

Full Text:



Afonso, A. & Jalles, J. T. (2017). Euro area time‐varying fiscal sustainability. International Journal of Finance & Economics, 22 (3), 244-254.

Arestis, P. (2011). Fiscal policy is still an effective instrument of macroeconomic policy. Panoeconomicus, 58 (2), 143-156.

Bajo-Rubio, O., Díaz-Roldan & C., Esteve, V. (2009). Deficit sustainability and inflation in EMU: An analysis from the fiscal theory of the price level. European Journal of Political Economy, 25 (4), 525–539.

Bajo-Rubio, O., Díaz-Roldan, C. & Esteve, V. (2014). Deficit sustainability, and monetary versus fiscal dominance: The case of Spain, 1850–2000. Journal of Policy Modeling, 36 (5), 924–937.

Bohn, H. (1998). The behavior of U.S. public debt and deficits. Quarterly Journal of Economic, 113 (3), 949–963.

Bohn, H. (2005). The sustainability of fiscal policy in the United States (CESifo Working Paper, 1446), Center for Economic Studies and Ifo Institute

Bohn, H. (2007). Are Stationarity and Cointegration Restrictions Really Necessary for the Intertemporal Budget Constraint? Journal of Monetary Economics, 54 (7), 1837-1847.

Canzoneri, M., Cumby, R. & Diba, B. (2001). Is the price level determined by the needs of fiscal solvency? American Economic Review, 91 (5), 1221–1238.

Cochrane, J. (2011). Understanding policy in the great recession: some unpleasant fiscal arithmetic. European Economic Review, 55 (1), 2–30.

Cochrane, J. (2001). Long-term debt and optimal policy in the fiscal theory of the price level. Econometrica, 69 (1), 69–116.

Elliott, G., Rothenberg, T. J. & Stock J. H. (1996). Efficient tests for an autoregressive unit root. Econometrica, 64 (4), 813–836.

Hatemi-J, A. (2002). Fiscal policy in Sweden: effects of EMU criteria convergence. Economic Modelling, 19 (1), 121-136.

Komulainen, T. & Pirttila, J. (2000). Fiscal Explanations for Inflation: Any Evidence from Transition Economies? (BOFIT Discussion Paper, 11), Helsinki: Bank of Finland, Institute for Economies in Transition.

Kwiatkowski, D., Phillips, P., Schmidt, P. & Shin, Y. (1992). Testing the Null Hypothesis of Stationarity against the Alternative of a Unit Root: How Sure Are We that Economic Time Series Have a Unit Root? Journal of Econometrics, 54 (1-3), 159-178.

Lame, G., Lequien, M. & Pionnier, P. (2014). Interpretation and limits of sustainability tests in public finance. Applied Economics, 46 (6), 616-628.

Leeper, E. (1991). Equilibria under “active‟ and “passive‟ monetary and fiscal policies. Journal of Monetary Economics, 27 (1), 129–147.

Leeper, E. (2010). Monetary Science, Fiscal Alchemy (NBER Working Paper 16510), Cambridge: National Bureau Of Economic Research

Leeper, E. M., & Walker, T. B. (2013). Perceptions and Misperceptions of Fiscal Inflation. In: Alesina, A. & Giavazzi, F. (Eds), Fiscal Policy after the Financial Crisis (pp. 255 - 299), University of Chicago Press

Mackiewicz-Lyziak, J. (2015). Fiscal Sustainability in CEE Countries – the Case of the Czech Republic, Hungary and Poland. Equilibrium. Quarterly Journal of Economics and Economic Policy, 10 (2), 53-71.

Montiel, P. J. (2011), Macroeconomics in emerging markets, Cambridge: Cambridge University Press.

Ng, S. & Perron, P. (1995). Unit Root Tests in ARMA Models with Data Dependent Methods for the Selection of the Truncation Lag. Journal of the American Statistical Association, 90 (429), 268-281.

Sargent, T. & Wallace, N. (1981). Some unpleasant monetary arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review, 5 (3), 1-17.

Sims, C. A. (1994). A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic Theory, 4 (3), 381–399.

Toda, H. & Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66 (1-2), 225-250.

Trenovski, B. & Tashevska, B. (2015). Fiscal or monetary dominance in a small, open economy with fixed exchange rate – the case of the Republic of Macedonia, Proceedings of Rijeka Faculty of Economics: Journal of Economics and Business, 33 (1), 125-145.

Uribe, M. (2016). Is the monetarist arithmetic unpleasant? (NBER Working Paper, 22866), Cambridge: National Bureau Of Economic Research

Zoli, E. (2005). How does fiscal policy affect monetary policy in emerging market countries? (BIS Working Paper, 174), Switzerland: Bank for International Settlements



  • There are currently no refbacks.

© University of Niš, Serbia
Creative Commons License CC BY-NC-ND
ISSN 0354-4699 (Print)
ISSN 2406-050X (Online)