Monetary-Fiscal Policy Coordination in the Euro Area under US Financial Shocks: A Structural Analysis Using the Euro Area Block of the Global Macro-Financial Model

Abstract This paper investigates the coordination of monetary and fiscal policies in the Euro Area in response to financial shocks originating from the United States, with a focus on the post-Global Financial Crisis period. Using a structurally estimated Global Macro-Financial Model, we analyze the transmission channels of US financial disturbances and assess the effectiveness of discretionary versus rule-based policy frameworks. Our results reveal heightened sensitivity of Euro Area financial markets and a constrained monetary policy environment after the crisis, which elevates the role of fiscal policy in stabilization efforts. Coordinated discretionary interventions, particularly led by monetary policy and supported by fiscal measures, deliver the most effective stabilization of stock markets and inflation, albeit with some temporary volatility in real GDP and unemployment. In contrast, rule-based policies offer moderate but more predictable outcomes, reflecting a trade-off between policy flexibility and credibility. These findings contribute to the literature on international macro-financial linkages and provide practical implications for policymakers navigating external financial shocks in an increasingly interconnected global economy.