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Fiscal policy in monetary unions: Implications for Europe

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  • Reuven Glick
  • Michael Hutchison

Abstract

This paper analyzes how the feasible mix of government expenditure and financing arrangements may change with the establishment of a monetary union such as that planned by members of the European Community. We find that a monetary union reduces the feasible divergence across countries in their present discounted levels of fiscal spending. Wide differences across countries in their present and future time patterns of spending are still possible, however. Examination of the empirical evidence suggests that the movement toward greater exchange rate fixity associated with the EMS and participation in “quasi” monetary unions havenot been accompanied by significant fiscal convergence. The experience of member states of several existing monetary unions, however, suggests that a more effective constraint to budgetary discipline arises within full-fledged unions in operation over long periods, even in the absence of binding central rules on government deficit and debt positions. Copyright Kluwer Academic Publishers 1993

Suggested Citation

  • Reuven Glick & Michael Hutchison, 1993. "Fiscal policy in monetary unions: Implications for Europe," Open Economies Review, Springer, vol. 4(1), pages 39-65, March.
  • Handle: RePEc:kap:openec:v:4:y:1993:i:1:p:39-65 DOI: 10.1007/BF00999553
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    References listed on IDEAS

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    1. Anne C. Case & James R. Hines, Jr. & Harvey S. Rosen, 1989. "Copycatting: Fiscal Policies of States and Their Neighbors," NBER Working Papers 3032, National Bureau of Economic Research, Inc.
    2. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
    3. Keuzenkamp, H.A. & van der Ploeg, F., 1990. "Saving, investment, government finance and the current account : The Dutch experience," Discussion Paper 1990-49, Tilburg University, Center for Economic Research.
    4. repec:fth:harver:1437 is not listed on IDEAS
    5. A. Lans Bovenberg & Jeroen J. M. Kremers & Paul R. Masson, 1991. "Economic and Monetary Union in Europe and Constraints on National Budgetary Policies," IMF Staff Papers, Palgrave Macmillan, vol. 38(2), pages 374-398, June.
    6. Djajic, Slobodan, 1987. "Effects of budgetary policies in open economies: The role of intertemporal consumption substitution," Journal of International Money and Finance, Elsevier, vol. 6(3), pages 373-383, September.
    7. Jeremy Greenwood & Kent P. Kimbrough, 1985. "Capital Controls and Fiscal Policy in the World Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 18(4), pages 743-765, November.
    8. Donato Masciandaro & Guido Tabellini, 1987. "Monetary regimes and fiscal deficits: a comparative analysis," Proceedings, Federal Reserve Bank of San Francisco, pages 125-152.
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    Cited by:

    1. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics.
    2. Kocenda, Evzen & Kutan, Ali M. & Yigit, Taner M., 2008. "Fiscal convergence in the European Union," The North American Journal of Economics and Finance, Elsevier, vol. 19(3), pages 319-330, December.
    3. repec:kap:iaecre:v:11:y:2005:i:1:p:29-38 is not listed on IDEAS
    4. Thomas D. Willett, "undated". "A Political Economy Analysis of the Maastricht and Stability Pact Fiscal Criteria," Claremont Colleges Working Papers 1999-33, Claremont Colleges.
    5. Anthony J. Pellechio & Saqib Rizavi & Phebby Kufa, 2003. "Fiscal Sustainability and Policy Issues in the Eastern Caribbean Currency Union," IMF Working Papers 03/162, International Monetary Fund.
    6. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, pages 265-284.
    7. Jeffrey A. Frankel, 2016. "International Coordination," NBER Working Papers 21878, National Bureau of Economic Research, Inc.
    8. Maurice Obstfeld, 1997. "Europe's Gamble," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(2), pages 241-317.
    9. Alesina, Alberto Francesco, 1997. "Comments on 'Europe's Gamble' by M. Obstfeld," Scholarly Articles 12553725, Harvard University Department of Economics.

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