The 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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Length: Date of creation: Mar 1994 Date of revision: Handle: RePEc:sur:surrec:9403
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. Contact details of provider: Postal: Guildford, Surrey GU2 5XH Phone: (01483) 259380 Fax: (01483) 259548 Email: Web page: http://www.econ.surrey.ac.uk More information through EDIRC
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Find related papers by JEL classification: 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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