@misc{38581,
title = {Monetary Policy under Fiscal Risk},
author = {Villamizar-Villegas, Mauricio and Valencia, Oscar and Prado Garcia, Andres Felipe and Aya, Nicolás},
year = {2026},
doi = {10.18235/0014598},
abstract = {Fiscal stance and sovereign credibility shape monetary policy transmission even outside fiscal dominance. Using a panel of advanced and emerging economies since the mid-1990s, we show that sovereign-risk regimes differ less by headline debt than by borrowing costs, debt composition, and interest burdens. Elevated sovereign risk weakens the transmission of monetary policy, foreign-exchange intervention, macroprudential tools, and capital- flow measures to prices, exchange rates, and output. A small open-economy model with a fiscal block can rationalize these patterns. Emerging markets operate under tighter fiscal constraints, rely more on multi-instrument configurations, and face a narrower stabilization frontier, including cases in which conventional tightening loses its disinflationary effect.},
url = {https://doi.org/10.18235/0014598}
}