Can we consider the policy instruments as cyclical substitutes? Some Empirical Evidence

The main objective of this article is to study how central banks and fiscal authorities interact when they conduct the economic policy. Specially, it seems very helpful to specify if this two policymakers act under complementary or substitutability strategy. Our methodology is based on a simple model of policy-mix that is estimated by panel data method. Our main results show that for seven OECD countries and during the period 1975-1997, the two policy instruments seem to be complementary. Moreover, even if the central banks become more and more independent during this period, the estimates underline that the reaction functions of central banks depend on output and the governments have continued to care about inflation rate.