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The role of fiscal policy in EMU: a simulation with EUROMON

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  • M. Demertzis
  • H.M.M. Peeters

Abstract

Country members of EMU as well as the United States have improved their fiscal positions during the course of the past decade. This article considers the impact of further government debt and deficit reductions in the EMU area. First the literature on government finance establishing the role of fiscal policy in macroeconomic management is reviewed. Next some empirical simulations using the macroeconometric multi-country model EUROMON of the Nederlandsche Bank are carried out. With these it is investigated what countries would have to incur if they were to improve their fiscal positions further and more generally, what is the role of fiscal policy in the context of the single currency. This discussion focusses on how countries' fiscal policy can affect first each other and second, general price stability. Finally, a US simulation is presented that shows the possible impact of a further improvement of the US fiscal position as recently projected by the Congressional Budget Office, on the eurozone.

Suggested Citation

  • M. Demertzis & H.M.M. Peeters, 2001. "The role of fiscal policy in EMU: a simulation with EUROMON," WO Research Memoranda (discontinued) 653, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:653
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    File URL: https://www.dnb.nl/binaries/wo0653_tcm46-145956.pdf
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    References listed on IDEAS

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    1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, July.
    2. Demertzis, Maria & Hughes Hallett, Andrew & Viegi, Nicola, 2004. "An independent central bank faced with elected governments," European Journal of Political Economy, Elsevier, vol. 20(4), pages 907-922, November.
    3. Elmendorf, Douglas W. & Gregory Mankiw, N., 1999. "Government debt," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 25, pages 1615-1669 Elsevier.
    4. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
    5. Roberto Perotti, 1999. "Fiscal Policy in Good Times and Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1399-1436.
    6. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    7. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
    8. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
    9. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, Oxford University Press, vol. 117(4), pages 1329-1368.
    10. Hughes Hallett, A J & Vines, D, 1993. "On the Possible Costs of European Monetary Union," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(1), pages 35-64, March.
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    More about this item

    Keywords

    fiscal policy; price stability; EMU; EUROMON;

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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