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Fiscal Policy in the European Monetary Union

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  • Betty C. Daniel

    (University at Albany)

  • Christos Shiamptanis

    (Central Bank of Cyprus)

Abstract

An EMU country that adheres to the Maastricht and the Stability and Growth Pact limits is implicitly promising not to allow its fiscal stance to deteriorate to a position in which it places pressure on the European Central Bank to forgo its price level target to finance fiscal deficits. Violation of these limits has raised questions about potential fiscal encroachment on the monetary authority’s freedom to determine the price level. We show that for the monetary authority to have the freedom to control price, the primary surplus must respond strongly enough to lagged debt. Panel estimates are consistent with monetary control of the price level.

Suggested Citation

  • Betty C. Daniel & Christos Shiamptanis, 2009. "Fiscal Policy in the European Monetary Union," Working Papers 2009-1, Central Bank of Cyprus.
  • Handle: RePEc:cyb:wpaper:2009-1
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    Cited by:

    1. Aldama, Pierre & Creel, Jérôme, 2019. "Fiscal policy in the US: Sustainable after all?," Economic Modelling, Elsevier, vol. 81(C), pages 471-479.
    2. Eric M. Leeper & Todd B. Walker, 2011. "Fiscal Limits in Advanced Economies," Economic Papers, The Economic Society of Australia, vol. 30(1), pages 33-47, March.
    3. ​pierre Aldama & Jérôme Creel, 2020. "Asymmetric Macroeconomic Stabilization And Fiscal Consolidation In The Oecd And The Euro Area," SciencePo Working papers Main hal-03403071, HAL.
    4. Michel Guillard & Hubert Kempf, 2017. "Public Debt Sustainability and Defaults," CESifo Working Paper Series 6554, CESifo.
    5. Richter, Alexander W., 2015. "Finite lifetimes, long-term debt and the fiscal limit," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 180-203.
    6. Daniel, Betty C. & Shiamptanis, Christos, 2012. "Fiscal risk in a monetary union," European Economic Review, Elsevier, vol. 56(6), pages 1289-1309.
    7. Christos Shiamptanis, 2012. "Risk Assessment Under a Non-linear Fiscal Rule," Working Papers 038, Ryerson University, Department of Economics.
    8. ​pierre Aldama & Jérôme Creel, 2016. "Why fiscal regimes matter for fiscal sustainability analysis: an application to France," Sciences Po publications 2016-15, Sciences Po.
    9. Yu HSING, 2017. "Is more government debt or currency depreciation expansionary? The case of Poland," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(612), A), pages 63-70, Autumn.
    10. Xavier Timbeau & OFCE Observatoire français des conjonctures économiques, 2014. "From austerity to stagnation how to avoid the deflation trap: The independant annual growth survey 2014," Sciences Po publications info:hdl:2441/c5gs2rgi93a, Sciences Po.
    11. Betty C. Daniel & Christos Shiamptanis, 2010. "Sovereign Default Risk in a Monetary Union," Working Papers 2010-3, Central Bank of Cyprus.
    12. Checherita-Westphal, Cristina & Žďárek, Václav, 2017. "Fiscal reaction function and fiscal fatigue: evidence for the euro area," Working Paper Series 2036, European Central Bank.
    13. Aura Gabriela SOCOL & Roxana Mirela FERARU, 2017. "The role of fiscal policy in the financial crisis. Challenges and solutions," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(2(611), S), pages 5-20, Summer.

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    More about this item

    Keywords

    European Monetary Union; monetary policy; fiscal policy; Fiscal Theory of the Price Level; panel cointegration; error correction;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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