Fiscal Policy Co-ordination under EMU and the Choice of Monetary Instrument
This paper examines the effects of fiscal policy coordination under European monetary union, stressing the interdependence of fiscal and monetary policy. The choice of monetary instrument by an independent European Central Bank is shown to be crucial. When the bank sets the nominal interest rate, this results in an upward bias in government spending that is worsened with fiscal policy coordination. If, however, the European Central Bank is perceived as controlling inflation, then fiscal policy coordination is welfare enhancing. Inflation rates, in equilibrium, are independent of the choice of monetary instrument and are lower if the bank is independent and run by conservative bankers. Copyright 1993 by Blackwell Publishers Ltd and The Victoria University of Manchester
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Volume (Year): 61 (1993)
Issue (Month): 0 (Suppl.)
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