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The role of fiscal policy in EMU: a simulation with EUROMON

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Author Info
M. Demertzis
H.M.M. Peeters

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Abstract

Country members of EMU as well as the United States have improved their fiscal positions during the course of the past decade. This article considers the impact of further government debt and deficit reductions in the EMU area. First the literature on government finance establishing the role of fiscal policy in macroeconomic management is reviewed. Next some empirical simulations using the macroeconometric multi-country model EUROMON of the Nederlandsche Bank are carried out. With these it is investigated what countries would have to incur if they were to improve their fiscal positions further and more generally, what is the role of fiscal policy in the context of the single currency. This discussion focusses on how countries' fiscal policy can affect first each other and second, general price stability. Finally, a US simulation is presented that shows the possible impact of a further improvement of the US fiscal position as recently projected by the Congressional Budget Office, on the eurozone.

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Paper provided by Netherlands Central Bank, Research Department in its series WO Research Memoranda (discontinued) with number 653.

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Date of creation: 2001
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Handle: RePEc:dnb:wormem:653

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Related research
Keywords: fiscal policy; price stability; EMU; EUROMON;

Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

References listed on IDEAS
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  1. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier. [Downloadable!] (restricted)
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  2. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November. [Downloadable!] (restricted)
    Other versions:
  3. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July. [Downloadable!] (restricted)
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  4. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November. [Downloadable!] (restricted)
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  5. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer. [Downloadable!] (restricted)
  6. Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  8. Hughes Hallett, A J & Vines, D, 1993. "On the Possible Costs of European Monetary Union," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 61(1), pages 35-64, March.
  9. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers 92-187, University of California at Berkeley. [Downloadable!]
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  10. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November. [Downloadable!] (restricted)
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