ECB Research Bulletin: Dovishness May Have Contributed to US GDP Recovery

19 December 2023

By Isabel Teles – FRANKFURT (Econostream) – A dovish monetary policy combined with fiscal support may have been key to the recovery of US GDP, according to a research bulletin published Tuesday by the European Central Bank.

‘Applied to recent years, our findings suggest that the combination of fiscal expansions in 2020 and a dovish FOMC may have played a role in the robust recovery in US GDP’, the authors of the bulletin said.

‘The striking differences in the GDP response align with the reaction of the policy rate’, the bulletin said.

‘Under a hawkish FOMC, the Federal Funds Rate increases in response to the spending shock, effectively preventing a rise in inflation expectations. Conversely, with a more dovish FOMC, the Federal Funds Rate initially falls, accompanied by a rise in inflation expectations. A dovish FOMC thus delays policy tightening in response to fiscal expansion’, it continued.

The authors of the bulletin concluded that fiscal and monetary policy should not be regarded separately.

‘Our findings highlight the power of monetary policy to steer the macroeconomy. Consequently, the effects of fiscal policy cannot be gauged reliably without accounting for the response of monetary policy’, the bulletin said.