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EMU and fiscal discipline: the end of the depreciation threat

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  • Heinemann, Friedrich

Abstract

Are the characteristics of the exchange rate regime relevant for the degree of fiscal discipline? What are the conclusions for fiscal behavior in Europe after the transition to EMU? These are the central questions that are analyzed in this paper from a theoretical point of view. After a general discussion of these issues, the optimization process of fiscal agents is analyzed in the context of a model based on the monetary approach to the exchange rate. The model conclusion is that monetary union leads to more fiscal discipline for high debt countries that used to have a benign neglect stance on the exchange rate. Contrasting to that, low debt countries that used to pay much attention to the exchange rate in the past will behave less disciplined in the future.

Suggested Citation

  • Heinemann, Friedrich, 1998. "EMU and fiscal discipline: the end of the depreciation threat," ZEW Discussion Papers 98-30, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:5204
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    Cited by:

    1. Carlos Vieira, 2004. "The Deficit?Interest Rate Connection: an empirical assessment of the EU," Economics Working Papers 5_2004, University of Évora, Department of Economics (Portugal).
    2. Heinemann, Friedrich, 1999. "Exchange rate regimes and fiscal discipline in OECD countries," ZEW Discussion Papers 99-04, ZEW - Leibniz Centre for European Economic Research.
    3. Philipp Paulus, 2004. "The fiscal stability impact of monetary unions - looking beneath the Stability Pact debate," Otto-Wolff-Institut Discussion Paper Series 05/2004, Otto-Wolff-Institut für Wirtschaftsordnung, Köln, Deutschland.

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    More about this item

    Keywords

    EMU; Exchange Rate Regime; Fiscal Discipline; Globalization; Public Debt;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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