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An Analysis of the Stability Pact

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  • Uhlig, H.F.H.V.S.
  • Beetsma, R.M.W.J.

    (Tilburg University, Center for Economic Research)

Abstract

We analyse the proposed "Stability Pact" for countries joining a European Monetary Union (EMU). In an EMU shortsighted governments fail to fully internalise the inflationary consequences of their debt policies. This results in excessive debt accumulation. Therefore, while in the absence of EMU governments have no incentive to sign a stability pact, under an EMU they prefer a stability pact which punishes excessive debt accumulation. With idiosyncratic shocks to the governments' budgets, an 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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1997-59.

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Date of creation: 1997
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Handle: RePEc:dgr:kubcen:199759

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

Related research

Keywords: Stability Pact; European Monetary Union; political distortions; monetary policy; debt policy; inflation;

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  1. 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.
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  3. Eijffinger, S. & De Hann, J., 1995. "The Political Economy of Central Bank Independence," Papers 9587, Tilburg - Center for Economic Research.
  4. 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.
  5. Alex Cukierman & Sebastian Edwards & Guido Tabellini, 1989. "Seigniorage and Political Instability," NBER Working Papers 3199, National Bureau of Economic Research, Inc.
  6. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  7. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1999. "Does monetary unification lead to excessive debt accumulation?," Journal of Public Economics, Elsevier, vol. 74(3), pages 299-325, December.
  8. Uhlig, Harald, 1997. "Long Term Debt and the Political Support of a Monetary Union," CEPR Discussion Papers 1603, C.E.P.R. Discussion Papers.
  9. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  10. Alberto Giovannini, 1996. "The Debate on Money in Europe," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262071681, December.
  11. 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.
  12. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
  13. Rudi Dornbusch, 1996. "Debt and Monetary Policy: The Policy Issues," NBER Working Papers 5573, National Bureau of Economic Research, Inc.
  14. Bohn, Henning, 1988. "Why do we have nominal government debt?," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 127-140, January.
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Cited by:
  1. Huizinga, Harry & Nielsen, Soren Bo, 1998. "Is Coordination of Fiscal Deficits Necessary?," CEPR Discussion Papers 1936, C.E.P.R. Discussion Papers.
  2. Matthias Sutter, 2000. "Flexible Integration, EMU and Relative Voting Power in the EU," Public Choice, Springer, vol. 104(1), pages 41-62, July.
  3. Samir Jahjah, 2001. "Financial Stability and Fiscal Crises in a Monetary Union," IMF Working Papers 01/201, International Monetary Fund.
  4. Russell W. Cooper & Hubert Kempf, 2000. "Designing Stabilization Policy in a Monetary Union," NBER Working Papers 7607, National Bureau of Economic Research, Inc.
  5. Marco Catenaro, 2000. "Macroeconomic Policy Interactions in the EMU: A Case for Fiscal Policy Co-ordination," School of Economics Discussion Papers 0003, School of Economics, University of Surrey.
  6. 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.
  7. Milesi-Ferretti, Gian Maria, 2004. "Good, bad or ugly? On the effects of fiscal rules with creative accounting," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 377-394, January.
  8. 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.
  9. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, vol. 11(4), pages 323-358, October.
  10. W. Bolt, 1999. "Fiscal Restraints, ECB Credibility and the Stability Pact:A Game-Theoretic Perspective," DNB Staff Reports (discontinued) 38, Netherlands Central Bank.
  11. Detken, Carsten, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series 0003, European Central Bank.

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