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Deficit sustainability and inflation in EMU: An analysis from the fiscal theory of the price level

  • Oscar Bajo-Rubio

    (Universidad de Castilla-La Mancha and Instituto de Estudios Fiscales)

  • Carmen Díaz-Roldán

    (Universidad de Castilla-La Mancha)

  • Vicente Esteve

    (Universidad de Valencia)

Price determination theory typically focuses on monetary plicy, while the role of fiscal policy is ussually neglected. From a different point of view, the Fiscal Theory of Price Level takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. In this paper we try to test empirically whether the time path of the government budget in EMU countries would have affected price level determination. Our results point to the sustainability of fiscal policy in all the EMU countries but Finland, although no firm conclusions can be drawn about the prevalence of either monetary or fiscal dominance.

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Paper provided by Asociación Española de Economía y Finanzas Internacionales in its series Working Papers with number 07-01.

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Length: 34 pages
Date of creation: Apr 2007
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Handle: RePEc:aee:wpaper:0701
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