Strategic Interactions between Monetary and fiscal Policies : a case study for the European Stability Pact
AbstractWe extend the model of Leith and Wren-Lewis (2000) to the case of a monetary union. Within a two-country dynamic model with wealth private behaviours, we study the implications of stabilising public debt on monetary and fiscal policies. The model is a macroeconomic version of the Fiscal Theory of the Price Level. We introduce an asymmetry in fiscal policies: one fiscal policy is ‘active’ in the short run; the other is always ‘passive’. Both policies are the outcomes of a game between the two governments and the ECB. In this framework, we assess the ‘beggar-thy-neighbour’ consequences of the passive fiscal policy in the fiscally-constrained country. Because of the inability of this government to implement an ‘active’ policy, the other government may incur a higher public debt burden. The ECB has to get more involved in the macroeconomic stabilisation process and has to prevent fiscal policy in the country with sound public finance from being too much active. The more substantial these ‘beggar-thy-neighbour’ effects, the more profitable cooperation between governments and the central bank.
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Bibliographic InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/3413.
Date of creation: Jun 2001
Date of revision:
fiscal theory of the price level; monetary and fiscal policies; EMU; Stability Pact;
Other versions of this item:
- Jérôme Creel, 2002. "Strategic interactions between monetary and fiscal policies: a case study for the European Stability Pact," Sciences Po publications info:hdl:2441/3221, Sciences Po.
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- 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; Treasury Policy
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
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