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Does Monetary Unification Lead to Excessive Debt Accumulation?

  • Beetsma, R.M.W.J.
  • Bovenberg, A.L.

If discretionary monetary policy implies an inflation bias, monetary unification boosts the accumulation of public debt. The additional debt accumulation is welfare reducing only if governments are sufficiently myopic. In the presence of myopic governments, debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allow a conservative, independent central bank to focus on price stability.

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Paper provided by DELTA (Ecole normale supérieure) in its series DELTA Working Papers with number 95-23.

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Length: 25 pages
Date of creation: 1995
Date of revision:
Publication status: Published in Journal of Public Economics, 1999, vol. 74, pp. 299-325
Handle: RePEc:del:abcdef:95-23
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  1. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  2. Alesina, Alberto F & Tabellini, Guido, 1988. "Voting on the Budget Deficit," CEPR Discussion Papers 269, C.E.P.R. Discussion Papers.
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  7. Thomas Krichel & Paul Levine & Joseph Pearlman, 1994. "Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetised Debt?," School of Economics Discussion Papers 9403, School of Economics, University of Surrey.
  8. Obstfeld, Maurice, 1991. "Dynamic Seigniorage Theory: An Exploration," CEPR Discussion Papers 519, C.E.P.R. Discussion Papers.
  9. Obstfeld, Maurice, 1991. "A model of currency depreciation and the debt-inflation spiral," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 151-177.
  10. Beetsma, Roel M W J & Jensen, Henrik, 1998. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 384-403, August.
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  13. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
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  18. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," CEPR Discussion Papers 722, C.E.P.R. Discussion Papers.
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  22. Joshua Aizenman, 1994. "On The Need For Fiscal Discipline in an Union," NBER Working Papers 4656, National Bureau of Economic Research, Inc.
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