IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

EMS interest rate differentials and fiscal policy: a model with an empirical application to Italy

Listed author(s):
  • R. Sean Craig
Registered author(s):

    This paper develops a model showing how EMS interest rate differentials are influenced by fiscal policy. For countries like Italy, with large budget deficits, the commitment to a stable EMS exchange rate can entail costly fiscal adjustment. If the government believes these costs to be excessive, it may choose to adopt a more inflationary monetary policy and realign periodically. It is this possibility that the policy of targeting the stable exchange rate will be abandoned in favor of one with periodic EMS realignments that contributes to the interest differential. ; Estimation of the model indicates that fiscal variables explain part of the Italian-German interest differential, and co-integration tests reveal that this relationship holds over the long-run. These results imply that the Italian-German interest differential is likely to persist in the second stage of European Monetary Union (EMU) if Italy fails to reduce its budget deficit, providing support for the view that fiscal convergence is a necessary element of EMU.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.federalreserve.gov/pubs/ifdp/1991/405/default.htm
    Download Restriction: no

    File URL: http://www.federalreserve.gov/pubs/ifdp/1991/405/ifdp405.pdf
    Download Restriction: no

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 405.

    as
    in new window

    Length:
    Date of creation: 1991
    Handle: RePEc:fip:fedgif:405
    Contact details of provider: Postal:
    20th Street and Constitution Avenue, NW, Washington, DC 20551

    Web page: http://www.federalreserve.gov/

    More information through EDIRC

    Order Information: Web: http://www.federalreserve.gov/pubs/ifdp/order.htm

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Buiter, Willem H., 1987. "Borrowing to defend the exchange rate and the timing and magnitude of speculative attacks," Journal of International Economics, Elsevier, vol. 23(3-4), pages 221-239, November.
    2. Svensson, Lars E. O., 1991. "The term structure of interest rate differentials in a target zone : Theory and Swedish data," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 87-116, August.
    3. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
    4. Rose, A.K. & Svensson, L.E., 1991. "Expected and Predicted Realignments: the FF/DM Exchange Rate during the EMS," Papers 485, Stockholm - International Economic Studies.
    5. Poterba, James M & Rotemberg, Julio J, 1990. "Inflation and Taxation with Optimizing Governments," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 1-18, February.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:fip:fedgif:405. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.