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Monetary policy and fiscal discipline in the EMU: a game-theoretic analysis of the Stability Pact

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  • W. Bolt

Abstract

In this report a formal game-theoretic framework is presented to analyse the effects of the Stability Pact on monetary policy in the EMU. First, the model shows that high deficits and government debt lead to excessive inflation, causing a rise in interest rates. Second, the analysis confirms the notion that the Stability Pact has a dampening effect on inflation, depending on the severity of the sanctions. Moreover, the analysis gives support to the much debated policy goal of 'close to balance or in surplus', concerning the deficit/GDP ratio. Finally, the model can also give insight in the relation between the economic independence of the ECB and the effectivity of the Stability Pact.

Suggested Citation

  • W. Bolt, 1997. "Monetary policy and fiscal discipline in the EMU: a game-theoretic analysis of the Stability Pact," WO Research Memoranda (discontinued) 529, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:529
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    Cited by:

    1. Richard Hule & Matthias Sutter, 2003. "Can the Stability and Growth Pact in EMU Cause Budget Deficit Cycles?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(1), pages 25-38, March.
    2. Eijffinger, Sylvester C W & Governatori, Matteo, 2004. "Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU," CEPR Discussion Papers 4647, C.E.P.R. Discussion Papers.
    3. W. Bolt, 1999. "Fiscal Restraints, ECB Credibility and the Stability Pact:A Game-Theoretic Perspective," DNB Staff Reports (discontinued) 38, Netherlands Central Bank.

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