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Interest rates, exchange rates and fiscal policy in Europe: the implications of Maastricht

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  • Ray Barrell
  • Jan in 't Veld
  • James Sefton

Abstract

This paper addresses the issue of fiscal solvency and the debt sustainability in a potential European Monetary Union using a forward looking, estimated neoclassical model of the World Economy. The implications of fiscal shocks to the European economies is analysed. Money base targetting is used in combination with a set of fiscal closure rules that ensure that the "no Ponzi-games" condition holds. The model as a result has a saddlepath and it is possible to solve with forward looking expectations. After discussing model properties the paper offers a suggestion for standardised analysis of fiscal policy on forward looking models. Changes in the target government deficit and sustained but ultimately transitory effects on output and unemployment. However, the costs of a contraction are not negligible. The paper draws some conclusions on the effects of the Maastricht fiscal solvency criteria.

Suggested Citation

  • Ray Barrell & Jan in 't Veld & James Sefton, 1993. "Interest rates, exchange rates and fiscal policy in Europe: the implications of Maastricht," National Institute of Economic and Social Research (NIESR) Discussion Papers 44, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:44
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    File URL: https://www.niesr.ac.uk/wp-content/uploads/1993/08/DP44.pdf
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    Cited by:

    1. Ulrich Fritsche & Camille Logeay & Kirsten Lommatzsch & Katja Rietzler & Sabine Stephan & Rudolf Zwiener unter Mitarb. von Cansel Kiziltepe & Christian Proano-Acosta, 2005. "Auswirkungen von länderspezifischen Differenzen in der Lohn-, Preisniveau- und Produktivitätsentwicklung auf Wachstum und Beschäftigung in den Ländern des Euroraums: Endbericht ; Forschungsprojekt im ," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 8, number pbk8, January.
    2. Gern, Klaus-Jürgen & Meier, Carsten-Patrick & Scheide, Joachim, 2003. "Higher economic growth through macroeconomic policy coordination? The combination of wage policy and monetary policy," Kiel Discussion Papers 399, Kiel Institute for the World Economy (IfW Kiel).

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