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Fiscal policy effectiveness and neutrality results in a non-Ricardian world

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  • Detken, Carsten

Abstract

The paper introduces monetary and fiscal regimes into a Blanchard-Weil overlapping generations model. Contrary to intuition, it is shown that fiscal policy becomes more effective, the less the central bank monetises government debt. Furthermore, there is a degree of debt monetisation at which Ricardian equivalence seems to hold in this 'non-Ricardian' model, as fiscal policy is neutral with respect to agent's net wealth. At the origin of these results are the opposite intergenerational wealth effects of money and debt financing. Since, on average, central bank independence increased through EMU, the analysis suggests that fiscal policy might have become a more powerful instrument for euro-area countries. It is further argued that given the Stability and Growth Pact, governments will find it wise to run budget positions 'close to balance or in surplus' in order to maintain the increased fiscal policy effectiveness. JEL Classification: E63

Suggested Citation

  • Detken, Carsten, 1999. "Fiscal policy effectiveness and neutrality results in a non-Ricardian world," Working Paper Series 3, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:19993
    Note: 229418
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    References listed on IDEAS

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    Cited by:

    1. Francesco Forte & Cosimo Magazzino, 2015. "Ricardian equivalence and twin deficits hypotheses in the euro area," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 17(2), pages 148-166, October.
    2. Barbara Annicchiarico, 2006. "Fiscal Policy and Exchange Rates," Journal of Economics, Springer, vol. 89(2), pages 165-185, November.
    3. Silvia Sgherri, 2002. "The fiscal dimension of a common monetary policy: results with a non-Ricardian global model," The European Journal of Finance, Taylor & Francis Journals, vol. 8(4), pages 449-479.
    4. Lorenzo Esposito & Giuseppe Mastromatteo, 2019. "Defaultnomics: Making Sense of the Barro-Ricardo Equivalence in a Financialized World," Economics Working Paper Archive wp_933, Levy Economics Institute.
    5. Kostas Drakos, 2001. "Testing the Ricardian Equivalence Theorem: Time Series Evidence from Greece," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 149-160, June.
    6. Padurean, Elena & Leonida, Ionel & Baltaretu, Camelia, 2010. "Evaluation Of The Fiscal-Budgetary Policy Sustainability In Romania," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 14(4), pages 126-139.
    7. Detken, Carsten & Winkler, Bernhard & Gaspar, Ví­tor, 2004. "On prosperity and posterity: the need for fiscal discipline in a monetary union," Working Paper Series 420, European Central Bank.
    8. Hiebert, Paul & Rostagno, Massimo & Pérez, Javier J., 2002. "Debt reduction and automatic stabilisation," Working Paper Series 189, European Central Bank.
    9. Annicchiarico, Barbara, 2003. "Government deficits, wealth effects and the price level in an optimizing model," Working Paper Series 285, European Central Bank.

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    More about this item

    Keywords

    central bank independence; fiscal policy effectiveness; monetary and fiscal policy regimes; ricardian equivalence; Stability and Growth Pact;
    All these keywords.

    JEL classification:

    • 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

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