Global growth on life support? The contributions of fiscal and monetary policy since the global financial crisis

This paper compares the role of monetary and fiscal policy shocks in advanced and emerging economies. Using a model with a hierarchical structure, we capture the variability of GDP response to policy shocks both between and within the groups of advanced and emerging countries. Our results show that the effects of fiscal stimulus are higher in advanced economies compared to emerging markets, while monetary policy is found to have more homogeneous effects on GDP. We quantify the policy contribution on GDP growth in the decade that followed the global financial crisis by means of a structural counterfactual analysis based on conditional forecasts. We find that global GDP growth benefited from substantial policy support during the global financial crisis but policy tightening thereafter, particularly fiscal consolidation, acted as a significant drag on the subsequent global recovery. In addition, we show that the role of policy has differed across countries. Specifically, in advanced economies, highly accommodative monetary policy has been counteracted by strong fiscal consolidation. By contrast, in emerging economies, monetary policy has been less accommodative since the global recession.