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Compatibility between monetary and fiscal policy under EMU

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  • Leith, Campbell
  • Wren-Lewis, Simon

Abstract

The potential importance of fiscal policy in influencing inflation has recently been highlighted, following Woodford (1998), under the heading of the 'Fiscal Theory of the Price Level' (FTPL). Some authors have suggested that this theory provides a rationale for the Pact for Stability and Growth as a necessary condition for the ECB pursuing a policy of price stability. In this paper, we relax the assumptions underpinning the FTPL by developing a two country open economy model, where each country has overlapping generations of non-Ricardian consumers who supply labour to imperfectly competitive firms which can only change their prices infrequently. We examine the case where the two countries have formed a monetary union, but where the fiscal authorities remain independent.
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Suggested Citation

  • Leith, Campbell & Wren-Lewis, Simon, 2006. "Compatibility between monetary and fiscal policy under EMU," European Economic Review, Elsevier, vol. 50(6), pages 1529-1556, August.
    • Handle: RePEc:eee:eecrev:v:50:y:2006:i:6:p:1529-1556
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    More about this item

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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