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The steady-state budget constraint and the integration of european financial markets: an arithmetical exercise

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  • José Ramalho

Abstract

This paper calculates the effect of European financial integration on the long-run sustainable budgetary situations of individual countries and highlights the adjustments required in order to conform with "integrated" and "domestic" steady-state scenarios. In the relative tightening/loosening of the steady-state budget constraint in comparing scenarios, the change in the real rates of interest is shown to play a central role, while the effect of the change in the reserve system variables is a minor one and that of the change in the rates of inflation is only significant in the highest inflation countries. Different factors are at play in the relative tightening/loosening of the steady-state budge constraint in small northern and southern countries. The tightening/loosening of the steady-state budget constraint between the "domestic" and "integrated" scenarios has implications for the comparative conduct of fiscal policy, in particular, taxation.

Suggested Citation

  • José Ramalho, 1990. "The steady-state budget constraint and the integration of european financial markets: an arithmetical exercise," BIS Working Papers 14, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:14
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    References listed on IDEAS

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    1. Michael R. Darby, 1984. "Some pleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    2. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    3. Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
    4. Preston J. Miller, 1983. "Budget deficit mythology," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    5. Thomas M. Supel & Richard M. Todd, 1984. "Should currency be priced like cars?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
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