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Structural distortions and decentralized fiscal policies in EMU

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  • Beetsma, R.M.W.J.

    (Tilburg University)

  • Bovenberg, A.L.

    (Tilburg University)

Abstract

The combination of discretionary monetary policy, labor-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, uniform debt ceilings must be complemented by country-specific debt targets in order to prevent decentralised fiscal authorities from employing debt policy strategically.

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-154977.

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Date of creation: 2005
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Publication status: Published in Journal of Money, Credit and Banking (2005) v.37, p.1001-1018
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-154977

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Web page: http://www.tilburguniversity.edu/

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References

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  1. Agell, Jonas & Calmfors, Lars & Jonsson, Gunnar, 1996. "Fiscal policy when monetary policy is tied to the mast," European Economic Review, Elsevier, Elsevier, vol. 40(7), pages 1413-1440, August.
  2. Svensson, L.E.O., 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," Papers, Stockholm - International Economic Studies 595, Stockholm - International Economic Studies.
  3. Beetsma, R.M.W.J. & Bovenberg, A.L. & Jensen, H., 1996. "Note on "Loss of monetary discretion in a simple dynamic policy game," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-73562, Tilburg University.
  4. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1999. "Does monetary unification lead to excessive debt accumulation?," Journal of Public Economics, Elsevier, Elsevier, vol. 74(3), pages 299-325, December.
  5. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 53-84, December.
  6. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  7. Dixon, Huw David & Santoni, Michele, 1997. "Fiscal Policy Coordination with Demand Spillovers and Unionised Labour Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(441), pages 403-17, March.
  8. Michael C. Burda, 2001. "European Labour Markets and the Euro: How Much Flexibility Do We Really Need?," Economics Working Papers, European Network of Economic Policy Research Institutes 003, European Network of Economic Policy Research Institutes.
  9. Jensen, Henrik, 1994. "Loss of monetary discretion in a simple dynamic policy game," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 18(3-4), pages 763-779.
  10. Jensen, Henrik, 1996. "The advantage of international fiscal cooperation under alternative monetary regimes," European Journal of Political Economy, Elsevier, Elsevier, vol. 12(3), pages 485-504, November.
  11. Xavier Debrun, 2000. "Fiscal Rules in a Monetary Union: A Short-Run Analysis," Open Economies Review, Springer, Springer, vol. 11(4), pages 323-358, October.
  12. Rogoff, Kenneth, 1985. "Can international monetary policy cooperation be counterproductive?," Journal of International Economics, Elsevier, Elsevier, vol. 18(3-4), pages 199-217, May.
  13. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199279173, October.
  14. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  15. Debrun, Xavier, 2001. "Bargaining over EMU vs. EMS: Why Might the ECB Be the Twin Sister of the Bundesbank?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(473), pages 566-90, July.
  16. Jay Bryson & Henrik Jensen & David Hoose, 1993. "Rules, discretion, and international monetary and fiscal policy coordination," Open Economies Review, Springer, Springer, vol. 4(2), pages 117-132, June.
  17. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 25(4), pages 619-30, October.
  18. Begg, David, 2000. "Beyond The Design Of Monetary Policy Alone: Fiscal Commitment, Macro Coordination, And Structural Adjustment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2637, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Roel M. W. J. Beetsma & Xavier Debrun & Franc Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," IMF Working Papers 01/178, International Monetary Fund.
  2. Sergey Merzlyakov, 2012. "Strategic Interaction Between Fiscal and Monetary Policies in an Export-Oriented Economy," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(2), pages 201-216, May.
  3. Georgios Chortareas & Christos Mavrodimitrakis, 2011. "Fiscal Policies and Monetary Leadership in a Monetary Union with a Deficit-Concerned Central Bank," Central European Journal of Economic Modelling and Econometrics, CEJEME, CEJEME, vol. 3(1), pages 1-24, March.
  4. repec:cbk:journl:v:2:y:2013:i:2:p:5-27 is not listed on IDEAS
  5. Florin Bilbiie, 2005. "Fiscal Contracts for a Monetary Union," Economics Papers 2005-W11, Economics Group, Nuffield College, University of Oxford.
  6. Kamal, Mona, 2010. "تجربة الاتحاد النقدي الأوروبي في مجال التنسيق بين السياستين المالية والنقدية
    [The Experience of the European Monetary Union in the
    ," MPRA Paper 27764, University Library of Munich, Germany.
  7. Fabrice Capoen & Jérôme Creel, 2007. "Efficiency of stability-oriented institutions: the European case," Sciences Po publications N°2007-06, Sciences Po.
  8. repec:spo:wpecon:info:hdl:2441/2977 is not listed on IDEAS
  9. Arby, Muhammad Farooq & Hanif, Muhammad Nadeem, 2010. "Monetary and fiscal policies coordination - Pakistan's experience," MPRA Paper 24160, University Library of Munich, Germany.
  10. L. Lambertini & R. Rovelli, 2003. "Monetary and fiscal policy coordination and macroeconomic stabilization. A theoretical analysis," Working Papers 464, Dipartimento Scienze Economiche, Universita' di Bologna.
  11. Damir Šehović, 2013. "General Aspects of Monetary and Fiscal Policy Coordination," Journal of Central Banking Theory and Practice, Central bank of Montenegro, Central bank of Montenegro, vol. 2(3), pages 5-27.
  12. Beetsma, Roel M.W.J. & Lans Bovenberg, A., 2006. "Political shocks and public debt: The case for a conservative central bank revisited," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 30(11), pages 1857-1883, November.

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