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How loose, how tight? A measure of monetary and fiscal stance for the euro area

This paper builds an index to examine the evolution of the joint monetary and fiscal policy stance in the euro area and its three largest member countries (France, Germany and Italy). The index provides an estimate of the overall stance of economic policies by quantifying the impact of conventional and unconventional fiscal and monetary policies on aggregate demand. The overall stance has been driven by an accommodative fiscal policy since the global financial crisis, which then turned restrictive due to the sovereign debt crisis. Since then, economic activity in the euro area and in its largest economies has been almost uniquely sustained by the ECB's accommodative monetary policy. The fiscal policy stance has subsequently become widely heterogeneous across euro-area countries.