The traditional view on price determination focuses on the role of monetary policy and the role of fiscal policy is usually neglected. Most analyses assume that the monetary authority is expected to set its control variable without facing any constraint, so that prices are determined by money supply and demand in a traditional way. Hovewer, a new approach has emerged in the 1990s, which allows fiscal policy to set primary surpluses to follow an arbitrary process, not necessarily compatible with solvency. “This theory could be of particular interest for monetary unions since it might contribute to explain the different evolution of the price level across the member countries. The aim of this paper is to test empirically by using panel data analysis whether the impact of the fiscal policy affects price level determination in both Old and New members and Candidate countries to the European Monetary Union. The panel data analysis basically evidences Ricardian or monetary dominant regime in all the groups.
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Find related papers by JEL classification: H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data