This paper examines the interaction between fiscal and monetary policies in Myanmar under ongoing political and economic uncertainty. We estimate a small open-economy New Keynesian DSGE model using Bayesian methods, combining the Kalman filter with Markov Chain Monte Carlo sampling on quarterly data from 2013Q1 to 2022Q1. The results show a persistent regime of monetary and fiscal policy conflict. While the central bank follows an active anti-inflationary interest rate rule that satisfies the Taylor principle, fiscal policy shows weak responsiveness to public debt, providing limited fiscal backing for monetary stabilization. As a result, monetary tightening aimed at controlling inflation exacerbates fiscal stress through the debt-service channel, undermining the overall effectiveness of macroeconomic stabilization. Political instability emerges as a key structural driver of macroeconomic fragility. Political shocks are highly persistent and are transmitted primarily through increases in the country risk premium, accounting for more than 50% of real exchange rate volatility and generating exchange rate depreciation, higher inflation, and output contraction. Overall, the findings indicate that monetary tightening alone is insufficient to restore macroeconomic stability in fragile and conflict-affected economies. Credible fiscal adjustment and improvements in political stability are necessary to contain external vulnerabilities and restore the effectiveness of monetary policy.
Pao et al. (Mon,) studied this question.