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Fiscal Policy in the European Monetary Union

  • Betty C. Daniel

    ()

    (University at Albany)

  • Christos Shiamptanis

    ()

    (Central Bank of Cyprus)

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.

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File URL: http://www.centralbank.gov.cy/media/pdf/_NPWPE_No1_072009.pdf
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Paper provided by Central Bank of Cyprus in its series Working Papers with number 2009-1.

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Length: 40 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:cyb:wpaper:2009-1
Contact details of provider: Web page: http://www.centralbank.gov.cy/nqcontent.cfm?a_id=1
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