Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetised Debt?
AbstractThe paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank (CB sets the nominal interest rate and responds to rising government debt/GDP ratios by monetisation. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the CB removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.
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Bibliographic InfoPaper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 9403.
Date of creation: Mar 1994
Date of revision:
Note: The paper was produced as part of a research programme on Economic and Monetary Union financed by the Leverhulme Trust. The authors acknowledge comments on earlier drafts of the paper made by participants at seminars or sessions given at Florida University, the RES Annual Conference 1992, the Money, Macroeconomics and Finance Study Group Annual Conference 1992 and Gdansk University. The usual disclaimer applies.
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monetary union; fiscal policy coordination; monetary and fiscal policy interdependence; reputation.;
Other versions of this item:
- Thomas Krichel & Paul Levine & Joseph Pearlman, 1996. "Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(1), pages 28-54, March.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- F15 - International Economics - - Trade - - - Economic Integration
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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