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Monetary and Fiscal Management, Finance, and Growth

  • Thorvaldur Gylfason

This lecture addresses three related aspects of monetary and fiscal management in Europe and elsewhere. First, I discuss the implications of economic integration for monetary and fiscal policy, especially the narrow focus on low inflation as the main objective of monetary policy. I argue that because inflation springs from several sources, monetary authorities held responsible by law for maintaining low inflation need to exercise their newfound independence by reserving the right to address all sources of inflation. In this context, I also ponder the question whether increased independence of fiscal policy from short-term political interference would be desirable. Second, I present new empirical evidence of the relationship between inflation, finance, and economic growth across countries, arguing that long-run growth considerations provide an important additional justification for why price stability ought to remain a priority of independent policy makers. Third, I review some further aspects of the relationship between fiscal policy and economic growth, emphasizing the traditional three-pronged role of fiscal management: stabilization, allocation, and distribution, all of which can be conducive to growth. The argument leads to the conclusion that only the stabilization function of fiscal policy and perhaps also some aspects of the allocation function could be usefully delegated in an attempt to immunize them from shortsighted and socially counter-productive political interference, but not the distribution function.

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File URL: http://hdl.handle.net/10.1007/s10663-004-0885-6
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Article provided by Springer in its journal Empirica.

Volume (Year): 31 (2004)
Issue (Month): 2 (June)
Pages: 71-91

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Handle: RePEc:kap:empiri:v:31:y:2004:i:2:p:71-91
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  1. A. Senhadji Semlali & Mohsin S. Khan, 2000. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Working Papers 00/110, International Monetary Fund.
  2. Gylfason, Thorvaldur & Herbertsson, Tryggvi Thor, 1996. "Does Inflation Matter for Growth?," CEPR Discussion Papers 1503, C.E.P.R. Discussion Papers.
  3. Lars Calmfors & Giancarlo Corsetti & Seppo Honkapohja & John Kay & Willi Leibfritz & Gilles Saint-Paul & Hans-Werner Sinn & Xavier Vives, 2005. "The Members of the European Economic Advisory Group at CESifo 2005," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 113-116, 03.
  4. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  5. Lindbeck, Assar & Persson, Mats, 2002. "The Gains from Pension Reform," Seminar Papers 712, Stockholm University, Institute for International Economic Studies.
  6. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  7. Temple, Jonathan, 2000. " Inflation and Growth: Stories Short and Tall," Journal of Economic Surveys, Wiley Blackwell, vol. 14(4), pages 395-426, September.
  8. Richard R. Nelson & Edmond S. Phelps, 1965. "Investment in Humans, Technological Diffusion and Economic Growth," Cowles Foundation Discussion Papers 189, Cowles Foundation for Research in Economics, Yale University.
  9. Gylfason, T, 1995. "The Macroeconomics of European Agriculture," Princeton Studies in International Economics 78, International Economics Section, Departement of Economics Princeton University,.
  10. Corsetti, Giancarlo & Devereux, Michael P. & Guiso, Luigi & Hassler, John & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2010. "The European economy," Munich Reprints in Economics 20104, University of Munich, Department of Economics.
  11. Gylfason, Thorvaldur & Weitzman, Martin, 2003. "Icelandic Fisheries Management: Fees versus Quotas," CEPR Discussion Papers 3849, C.E.P.R. Discussion Papers.
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