The fiscal multiplier in presence of unconventional monetary policy: Evidence for 17 OECD countries

Abstract

Following the exhaustion of conventional interest-rate tools during the 2008 financial crisis, central banks relied on unconventional monetary policy, which ultimately proved insufficient to stimulate aggregate demand. This paper evaluates the interaction between unconventional monetary policy and fiscal stabilization measures. Leveraging annual macro-data for 17 OECD countries spanning 1978–2019—and extending the narrative approach to cover 2016–2019—we introduce a novel country-heterogeneity instrument for unconventional monetary policy. Combining local projections with the Kitagawa-Blinder-Oaxaca decomposition, our analysis estimates the unconventional monetary–fiscal multiplier. The results reveal that, under accommodative monetary conditions, the multiplier ranges between 1.7 and 5, underscoring significant positive interactions between fiscal and unconventional monetary interventions. These findings contribute new empirical insights into policy coordination, showing that joint monetary–fiscal strategies can enhance macroeconomic stabilization.