The Stability Pact and Feedback Policy Effects
AbstractWe use a two-country dynamic model in a monetary union in which we introduce a wealth private behaviour. We study the implications of public debt on monetary and fiscal policies in the short and the long run. We analyse the effects of asymmetric fiscal policies in Euroland: the first country has fiscal room for manoeuvre whereas the second country is fettered by the Stability Pact. We show that such a situation creates two feedback effects which reduce the efficiency of economic policies. First, because of the inability of one government to implement an expansionist fiscal policy, the other government has to substitute for it in order to stabilise inflation and production. Second, the ECB's involvement in macroeconomic stabilisation will also be exacerbated. The more substantial these effects, the more co-operation is needed between European governments and the ECB.
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Bibliographic InfoPaper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 1999-02.
Date of creation: 1999
Date of revision:
Publication status: published in Journal of Economic Integration, 17(3), September 2002.
monetary and fiscal policies; EMU; Stability Pact; fiscal theory of inflation; public debt.;
Other versions of this item:
- E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
- 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
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
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