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Inflation Divergence and Public Deficits In an Monetary Union

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  • Jérôme Creel

    (OFCE)

  • Jacques Le Cacheux

    (OFCE)

Abstract

We reconsider the link between domestic public debts and average and domestic inflation rates in a monetary union, using a modified version of a model by B-V (2002). It is thus possible to show that the causation between the inflation dynamics and the public finances might go from the former to the latter. We are thus able to tackle the issue of persistently divergent inflation rates within the euro area. We also demonstrate that the homogeneous fiscal rules defined in the Stability and Growth Pact are ill-suited and might even be counterproductive. This conclusion is all the more true as the EU is on the eve of enlargement towards the CEECs: our results show that imposing homogeneous fiscal rules to the CEECs may prove disruptive.

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Paper provided by Sciences Po in its series Sciences Po publications with number N° 2003-05.

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Date of creation: Jul 2003
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Handle: RePEc:spo:wpmain:info:hdl:2441/2302

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  1. Beetsma, Roel & Vermeylen, Koen, 2002. "The Effect of Monetary Unification on Public Debt and its Real Return," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3491, C.E.P.R. Discussion Papers.
  2. Coricelli, Fabrizio & Ercolani, Valerio, 2002. "Cyclical and Structural Deficits on the Road to Accession: Fiscal Rules for an Enlarged European Union," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3672, C.E.P.R. Discussion Papers.
  3. Guilhem Bentoglio & Jacky Fayolle & Matthieu Lemoine, 2002. "Unity and Plurality of the European Cycle," Documents de Travail de l'OFCE, Observatoire Francais des Conjonctures Economiques (OFCE) 2002-03, Observatoire Francais des Conjonctures Economiques (OFCE).
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  5. D. Mario Nuti, 2002. "Costs and benefits of unilateral euroization in central eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 10(2), pages 419-444, July.
  6. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(3), pages 669-728, August.
  7. Babetskii, Ian & Boone, Laurence & Maurel, Mathilde, 2004. "Exchange rate regimes and shocks asymmetry: the case of the accession countries," Journal of Comparative Economics, Elsevier, vol. 32(2), pages 212-229, June.
  8. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
  9. Willem H. Buiter, 2002. "The Fiscal Theory Of The Price Level: A Critique," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(481), pages 459-480, July.
  10. Jan Babetski & Laurence Boone & Mathilde Maurel, 2003. "Exchange Rate Regimes and Supply Shocks Asymmetry: the Case of the Accession Countries," CERGE-EI Working Papers wp206, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  11. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  12. Tamim Bayoumi and Barry Eichengreen., 1992. "Shocking Aspects of European Monetary Unification," Economics Working Papers, University of California at Berkeley 92-187, University of California at Berkeley.
  13. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  14. Willem H. Buiter & Clemens Grafe, 2004. "Patching up the Pact," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 12(1), pages 67-102, 03.
  15. Bergin, Paul R., 2000. "Fiscal solvency and price level determination in a monetary union," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(1), pages 37-53, February.
  16. Jérôme Creel & Henri Sterdyniak, 2000. "La théorie budgétaire du niveau des prix, un bilan critique," Sciences Po publications 2000-03, Sciences Po.
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