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Interaction between Monetary and Fiscal Policy in a Small Open Economy with Autonomous Monetary Policy and Fiscal Policy Rule

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  • David Prusvic

    ()
    (University of Economics, Prague)

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    Abstract

    The study discusses central bank’s and government’s behaviour in a small open economy with a strong autonomous monetary policy and fiscal policy restricted by fiscal policy rule. Composed model thus fully corresponds to the Czech reality, where the Czech National Bank’s independency is evaluated as a very strong one, its monetary-policy regime is inflation targeting and Czech public finance, or the General Government Sector’s finance (according to the system of national accounts ESA 95), must follow fiscal policy rules of the Stability and Growth Pact. It simply claims deficits not to exceed the 3% level of GDP and public debt should remain below the 60% of GDP limit. Because the Czech economy is not confronted with the “excessive debt” problem and it seems it won’t be for a few years, the analysis focuses an attention especially on deficit limit criteria. The last part of the study is denoted to the common monetary policy and individual fiscal policy problematic, again from the small open economy point of view. The study could contribute to solution of the question, what fiscal policy should be practiced before and after the Economic and Monetary Union entrance.

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    Bibliographic Info

    Article provided by University of Finance and Administration in its journal ACTA VSFS.

    Volume (Year): 2 (2008)
    Issue (Month): 1 ()
    Pages: 56-79

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    Handle: RePEc:prf:journl:v:2:y:2008:i:1:p:56-79

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    Related research

    Keywords: Fiscal Policy; Monetary Policy; Fiscal Policy Rule; Monetary Policy Rule; Interaction; Open Economy; Inflation Targeting;

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    1. Wagner, Wolf & Marsh, Ian W., 2006. "Credit risk transfer and financial sector stability," Journal of Financial Stability, Elsevier, vol. 2(2), pages 173-193, June.
    2. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.).
    3. John G. Cragg & Russell S. Uhler, 1970. "The Demand for Automobiles," Canadian Journal of Economics, Canadian Economics Association, vol. 3(3), pages 386-406, August.
    4. Boris Hofmann, 2001. "The determinants of private sector credit in industrialised countries: do property prices matter?," BIS Working Papers 108, Bank for International Settlements.
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