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Financial Stability and Fiscal Crises in a Monetary Union

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  • Samir Jahjah
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    Abstract

    The main tasks of central banks are to secure price and financial stability. These objectives can, in times of crises, conflict with one another, and the central bank may have to renounce one of them in order to secure the other. In a monetary union, this trade-off can be exacerbated by the presence of highly indebted countries or by the risk of loose fiscal policies. This paper offers a simple theoretical model that captures the trade-off. Different fiscal institutions are compared in order to evaluate their impact on the conduct of monetary policy. More specifically, the fiscal criteria of the Maastricht Treaty and the Pact for Stability and Growth in Europe are analyzed in light of this model. Fiscal mechanisms exist to help prevent or minimize the risk of fiscal crises and the corresponding risk of central bank financing and inflation.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/201.

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    Length: 25
    Date of creation: 01 Dec 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/201

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    Related research

    Keywords: Public debt; Domestic debt; Economic models; Financial stability; central bank; inflation; monetary policy; monetary union; fiscal policy; fiscal crises; fiscal coordination; fiscal criteria; fiscal crisis; optimal monetary policy; debt service; budget constraint; fiscal discipline; government securities; monetary integration; monetary base; fiscal policies; fiscal transfers; monetary fund; taxation; excessive deficits; loose fiscal policies; money supply; monetary unions; monetary unification; tax policy; government budget constraint; public finance; government budget; european monetary union; fiscal federalism; fiscal implication; international monetary arrangements; fiscal institutions; budget deficit; loose monetary policy; monetary economics; monetary regimes; fiscal flows; fiscal relations; government borrowing constraints; fiscal deficits; intergovernmental fiscal relations; monetary regime; tax revenues; fiscal theory; primary budget deficit; public expenditure; monetary arrangements; money demand; tax revenue; tax avoidance; government expenditures; budget deficits; fiscal retrenchment; fiscal costs; fiscal mechanism; national budget; government primary budget deficit; fiscal soundness; monetary institution; level of debt service; fiscal regime; intergovernmental fiscal; tight monetary policy; budget constraints;

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    Cited by:
    1. Anthony J. Pellechio & Saqib Rizavi & Phebby Kufa, 2003. "Fiscal Sustainability and Policy Issues in the Eastern Caribbean Currency Union," IMF Working Papers 03/162, International Monetary Fund.

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