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Two Naked Emperors? Concerns about the Stability and Growth Pact and Second Thoughts About Central Bank Independence

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Buiter, Willem H

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Abstract

This 2003 Institute for Fiscal Studies Lecture addresses two sets of issues relevant to current and prospective future E(M)U members: the consequences of the Stability and Growth Pact for fiscal-financial sustainability and macroeconomic stability, and some risks associated with operational independence of the central bank. The relevance of the second issue is not restricted to E(M)U members. Poor communication, cooperation and coordination between the fiscal and monetary authorities can be costly in two contingencies. The first of these occurs when the central bank’s role as the lender of last resort needs to be backed up by the willingness of the Treasury to recapitalize the central bank, should the need arise. The second contingency occurs when unwanted deflation needs to be prevented or combated, but the central bank’s conventional monetary arsenal is exhausted. Friedman’s helicopter drop of money, a temporary tax cut or transfer payment increase financed through the issuance of base money will always stimulate demand provided it is not expected to be reversed, in present value terms, in the future. In most real-world institutional/legal settings the implementation of a helicopter drop of base money requires coordinated actions by the central bank and Treasury. Central bank independence is unlikely to survive if either or both of these contingencies occur, if there is an ineffective response by the fiscal and monetary authorities and if this is blamed on lack of communication, cooperation or coordination.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4001.

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Date of creation: Aug 2003
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Handle: RePEc:cpr:ceprdp:4001

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Related research
Keywords: central bank independence; deflation; fiscal rules; helicopter money drop; lender of last resort; stability and growth pact; zero bound;

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
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
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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References listed on IDEAS
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. Buiter, Willem H, 2003. "Deflation: Prevention and Cure," CEPR Discussion Papers 3869, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Bennett T. McCallum, 1995. "Two Fallacies Concerning Central Bank Independence," NBER Working Papers 5075, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. McCallum, Bennett T., 1997. "Crucial issues concerning central bank independence," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 99-112, June. [Downloadable!] (restricted)
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  4. Willem H. Buiter & Clemens Grafe, 2004. "Patching up the Pact," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(1), pages 67-102, 03. [Downloadable!] (restricted)
  5. Padoa-Schioppa, Tommaso, 1999. "EMU and Banking Supervision," International Finance, Blackwell Publishing, vol. 2(2), pages 295-308, July. [Downloadable!] (restricted)
  6. Willem H. Buiter & Nikolaos Panigirtzoglou, 2003. "Overcoming the zero bound on nominal interest rates with negative interest on currency: gesell's solution," Economic Journal, Royal Economic Society, vol. 113(490), pages 723-746, October. [Downloadable!] (restricted)
  7. Goodfriend, Marvin, 2000. "Overcoming the Zero Bound on Interest Rate Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 1007-35, November.
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  8. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, vol. 18(3-4), pages 199-217, May. [Downloadable!] (restricted)
  9. Willem H. Buiter, 2003. "Ten Commandments for a Fiscal Rule in the E(M)U," Oxford Review of Economic Policy, Oxford University Press, vol. 19(1), pages 84-99.
  10. Willem H Buiter & Nikolaos Panigirtzoglou, . "Liquidity traps: how to avoid them and how to escape them," Bank of England working papers 111, Bank of England. [Downloadable!]
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  11. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  12. Christophe Chamley, 1984. "Optimal Taxation of Capital Income in Economies with Identical Private and Social Discount Rates," Cowles Foundation Discussion Papers 699, Cowles Foundation, Yale University. [Downloadable!]
  13. Samuelson, Paul A, 1994. "Facets of Balassa-Samuelson Thirty Years Later," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 201-26, October.
  14. Charles Goodhart, 1999. "Recent Developments in Central Banking: Some Special Features of the Monetary Policy Committee and of the European System of Central Banks," FMG Special Papers sp118, Financial Markets Group. [Downloadable!] (restricted)
  15. Chamley, Christophe, 1981. "The Welfare Cost of Capital Income Taxation in a Growing Economy," Journal of Political Economy, University of Chicago Press, vol. 89(3), pages 468-96, June. [Downloadable!] (restricted)
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  16. Hans-Werner Sinn, 2004. "The New Systems Competition," Perspektiven der Wirtschaftspolitik, Blackwell Publishing, vol. 5(1), pages 23-38, 02. [Downloadable!] (restricted)
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Full references

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. Willem H. Buiter, 2003. "Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap," NBER Working Papers 10163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Willem H. Buiter, 2007. "Seigniorage," NBER Working Papers 12919, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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