Macroeconomic Policy and Economic Performance in Developing Countries

In this article, I examine the relationship between monetary and fiscal policies in a panel of 70 developing countries. I find that the size of the government's defict and the methods by which it is financed are strongly related to monetary policy reactions to increases in both government credit and foreign assets. In particular, larger deficits and greater reliance by governments on the domestic banking system are associated with more accommodative monetary policies.