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An Analysis of the 'Stability Pact'

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Author Info
Beetsma, Roel
Uhlig, Harald

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Abstract

We analyse the proposed ‘stability pact’ for countries joining a European Monetary Union (EMU). Within EMU shortsighted governments fail to fully internalize the inflationary consequences of their debt policies, which results in excessive debt accumulation. Hence, although in the absence of EMU governments have no incentive to sign a stability pact, within EMU they prefer a stability pact which punishes excessive debt accumulation. With idiosyncratic shocks to governments’ budgets, EMU combined with an appropriately designed stability pact will be strictly preferred to autonomy. While the stability pact corrects the average debt bias, inflation, which is attuned to the Union-average debt level, is more stable.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1669.

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Date of creation: Jul 1997
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Handle: RePEc:cpr:ceprdp:1669

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Related research
Keywords: Debt Policy; European Monetary Union; Inflation; Monetary Policy; Political Distortions; Stability Pact;

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management

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  5. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 763-779. [Downloadable!] (restricted)
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  7. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Blackwell Publishing, vol. 57(3), pages 403-14, July. [Downloadable!] (restricted)
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  9. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
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  11. Uhlig, H., 1997. "Long term debt and the political support for a monetary union," Discussion Paper 13, Tilburg University, Center for Economic Research. [Downloadable!]
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  12. Eijffinger, S-C-W & de Haan, J, 1996. "The Political Economy of Central-Bank Independence," Princeton Studies in International Economics 19, International Economics Section, Departement of Economics Princeton University,.
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  13. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1997. "Central bank independence and public debt policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 873-894, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Andrew Hughes Hallett, 2008. "Sustainable fiscal policies and budgetary risk under alternative monetary policy arrangements," Economic Change and Restructuring, Springer, vol. 41(1), pages 1-28, March. [Downloadable!] (restricted)
  2. Huizinga, H. & Nielsen, S.B., 1998. "Is coordination of fiscal deficits necessary?," Discussion Paper 61, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  3. Marco Catenaro, 2000. "Macroeconomic Policy Interactions in the EMU: A Case for Fiscal Policy Co-ordination," Department of Economics Discussion Papers 0003, Department of Economics, University of Surrey. [Downloadable!]
  4. Milesi-Ferretti, Gian Maria, 2001. "Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting," CEPR Discussion Papers 2663, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Bernhard Winkler, 1999. "Co-ordinating Stability: Some Remarks on the Roles of Monetary and Fiscal Policy under EMU," Empirica, Springer, vol. 26(3), pages 287-295, September. [Downloadable!] (restricted)
  6. Samir Jahjah, 2001. "Financial Stability and Fiscal Crises in a Monetary Union," IMF Working Papers 01/201, International Monetary Fund. [Downloadable!]
  7. W. Bolt, 1999. "Fiscal Restraints, ECB Credibility and the Stability Pact:A Game-Theoretic Perspective," DNB Staff Reports (discontinued) 38, Netherlands Central Bank. [Downloadable!]
  8. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October. [Downloadable!] (restricted)
  9. Carsten Detken, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series 3, European Central Bank. [Downloadable!]
  10. Russell Cooper & Hubert Kempf, 2000. "Designing stabilization policy in a monetary union," Working Paper 0001, Federal Reserve Bank of Cleveland. [Downloadable!]
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  11. Matthias Sutter, 2000. "Flexible Integration, EMU and Relative Voting Power in the EU," Public Choice, Springer, vol. 104(1), pages 41-62, July. [Downloadable!] (restricted)
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