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Money, fiscal deficits and government debt in a monetary union

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Author Info
Aarle, B. van
Bovenberg, L.
Raith, M. (Tilburg University, Center for Economic Research)

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Abstract

The replacement of national currencies by a common currency in the EMU causes a monetary externality if the European Central Bank is inclined to monetize part of outstanding government debt in the community. High government debt in one part of the EU then increases the common inflation rate. We model debt stabilization in the EU as a differential game between fiscal authorities and the ECB. Three different equilibria are considered: the Nash open-loop equilibrium, the Stackelberg open-loop equilibrium with the ECB leading and the Stackelberg open-loop equilibrium with the fiscal authorities leading. Dynamics of the fiscal deficits, inflation and government debt in a monetary union are derived and compared with an EU with national monetary policies.

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Publisher Info
Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 34.

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Date of creation: 1996
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Handle: RePEc:dgr:kubcen:199634

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Find related papers by JEL classification:
C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary 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
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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This page was last updated on 2009-11-25.

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