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Central Bank Reaction To Public Deficit And Sound Public Finance The Case Of The European Monetary Union

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  • Rosaria Rita Canale

Abstract

The paper aims to shed light on the relation between monetary and fiscal policy in EMU focusing on the interest rates and deficit dynamics We present a theoretical model in which monetary and fiscal policy independently interact through their own instrument namely the rate of interest for the central bank and deficit spending for governments We demonstrate that the possibility of the two policy authorities producing not conflicting results depends on the idea each has of the workings of the economic system and on the influence each variable has on inflation and equilibrium income Furthermore the inflationary opinion of the ECB about deficit spending leads to the result that public finance becomes surely unsound unless governments stop using expansionary instruments We provocatively conclude that the limits set by the Maastricht Treaty are a necessary solution to avoid unsound public finance

Suggested Citation

  • Rosaria Rita Canale, 2010. "Central Bank Reaction To Public Deficit And Sound Public Finance The Case Of The European Monetary Union," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 1(1), pages 4-17.
    • Handle: RePEc:srs:jasf00:v:1:y:2010:i:1:p:4-17
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    Cited by:

    1. Canale, Rosaria Rita & Napolitano, Oreste, 2009. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 20207, University Library of Munich, Germany.
    2. Nothando Moyo, 2014. "Fundamental Flaws in the Architecture of the European Central Bank: The Possible End of the Euro Zone and its Effects to East African Community (EAC) Countries," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 2(2), pages 21-33.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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