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Does Monetary Unification Lead to Excessive Debt Accumulation?

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  • Beetsma, Roel
  • Bovenberg, A Lans

Abstract

If discretionary monetary policy implies an inflation bias, monetary unification boosts the accumulation of public debt. The additional debt accumulation is welfare reducing only if governments are sufficiently myopic. In the presence of myopic governments, debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allow a conservative, independent central bank to focus on price stability.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1299.

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Date of creation: Nov 1995
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Handle: RePEc:cpr:ceprdp:1299

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Keywords: Common Central Bank; Credibility Effect; Government Myopia; Monetary Union; Optimal Debt Target; Price Stability Weight;

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