Abstract
Applying local projection-based instrumental variables methods, we empirically explore monetary and fiscal policy dependencies in a small open and emerging economy, Poland. In particular, we study whether the effects of a government spending shock on output depend on the degree to which monetary policy is active. We conclude that the cumulative government spending multiplier is not systematically dependent on the monetary policy regime. It suggests that monetary policy does not react to fiscal expansions, which can be related to sustainability of fiscal policy in Poland in the period under consideration. We estimate a peak cumulative linear multiplier of 1.53 after six quarters over the full sample and of 1.38 after eight quarters over the period before Covid-19. In addition, we detect no dependence on business cycle states. Furthermore, we find no statistically significant crowding-out effects originating from government investment. Our results are robust to various alternative empirical specifications.