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Fiscal and monetary policy interactions: lessons for revising the EU Stability and Growth Pact

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  • Mark Setterfield

Abstract

This paper explores the macroeconomic consequences of interactions between fiscal and monetary policy, in an environment characterized by endogenous money in which the interest rate is set exogenously by the central bank. Three "benchmark" interest rate operating procedures are identified, none of which presupposes that the main purpose of the central bank is to engage in inflation targeting. The paper then explores the consequences for macroeconomic performance (specifically, short-run growth and the rate of inflation) of activist fiscal policies designed to raise the short-run growth rate. The results provide insights into fiscal and monetary policy interactions in the sort of macroeconomic environment envisaged by some critics of the European Central Bank and the Stability and Growth Pact. In so doing, they provide lessons for those calling for fundamental reforms of both institutions.

Suggested Citation

  • Mark Setterfield, 2009. "Fiscal and monetary policy interactions: lessons for revising the EU Stability and Growth Pact," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 31(4), pages 623-643, July.
    • Handle: RePEc:mes:postke:v:31:y:2009:i:4:p:623-643
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    Citations

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    Cited by:

    1. Hiroshi Nishi, 2014. "Varieties of economic growth regimes, types of macroeconomic policies and policy regimes: a post-Keynesian analysis," Chapters, in: Hideko Magara (ed.), Economic Crises and Policy Regimes, chapter 5, pages 101-123, Edward Elgar Publishing.
    2. Louis-Philippe Rochon & Marc Setterfield, 2011. "Post-Keynesian Interest Rate Rules and Macroeconomic Performance: A Comparative Evaluation," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 7, Edward Elgar Publishing.
    3. Ngai, Victor, 2012. "Stability and Growth Pact and Fiscal Discipline in the Eurozone," Working Papers 12-10, University of Pennsylvania, Wharton School, Weiss Center.
    4. Eric Wang & Eskander Alvi, 2011. "Relative Efficiency of Government Spending and Its Determinants: Evidence from East Asian Countries," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 1(1), pages 3-28, June.
    5. Muhammad Ali Nasir & Alaa M. Soliman, 2014. "Aspects of Macroeconomic Policy Combinations and Their Effects on Financial Markets," Economic Issues Journal Articles, Economic Issues, vol. 19(1), pages 95-118, March.
    6. Forges Davanzati, Guglielmo & Pacella, Andrea, 2013. "The profits-investments puzzle: A Post Keynesian-Institutional interpretation," Structural Change and Economic Dynamics, Elsevier, vol. 26(C), pages 1-13.
    7. Carlos Eduardo Iwai Drumond & Cleiton Silva Jesus & João Basilio Pereima & Hiroyuki Yoshida, 2022. "Alternative monetary policy rules and expectational consistency," Evolutionary and Institutional Economics Review, Springer, vol. 19(1), pages 319-341, April.

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