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Money, Fiscal Defecits and Government Debt in a Monetary Union

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Author Info

  • Aarle, B. van
  • Bovenberg, A.L.
  • Raith, M.

    (Tilburg University, Center for Economic Research)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1996-34.

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

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Web page: http://center.uvt.nl

Related research

Keywords: EMS; central banks; monetary policy; fiscal policy; game theory;

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Cited by:
  1. Daly, Hounaida & Smida, Mounir, 2013. "Interaction entre politique monétaire et politique budgétaire:Cas de la Grèce
    [Fiscal and Monetary Policy Interactions : The Greece Case]
    ," MPRA Paper 45931, University Library of Munich, Germany.
  2. Daly, Hounaida & Smida, Mounir, 2013. "La coordination des politiques monétaire et budgétaire: Aperçu théorique
    [Coordination of monetary and fiscal policies: Theoretical Overview]
    ," MPRA Paper 48066, University Library of Munich, Germany.

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