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Fiscal Backing for Price Stability in a Monetary Union

Author

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  • Bartosz Maćkowiak
  • Sebastian Schmidt

Abstract

Fiscal backing is the idea that for the price level to be uniquely determined, fiscal policy must be active at least in some states of the world. We extend the fiscal theory of the price level to a heterogenous monetary union. Different combinations of national fiscal policies and a common fiscal policy with "Eurobonds" amount to active fiscal policy for the union. They all yield price-level determinacy but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy to provide fiscal backing reliably.

Suggested Citation

  • Bartosz Maćkowiak & Sebastian Schmidt, 2025. "Fiscal Backing for Price Stability in a Monetary Union," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(3), pages 237-269, July.
    • Handle: RePEc:aea:aejmac:v:17:y:2025:i:3:p:237-69
    DOI: 10.1257/mac.20220364
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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; Modern Monetary Theory
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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