A Case for Fiscal Policy Co-ordination in Europe
In this paper we analyse the impact of fiscal policy co-ordination in a monetary union on the size of the spending bias, inflation and the optimal degree of conservatism of the central bank. Our main result is that, when the fiscal authorities internalise the spillover effects originating from their loose fiscal stances, the size of the inflation bias decreases. As a result, the optimal degree of conservatism declines as well. Moreover, we show that the Stability Pact can be seen as an optimally designed linear penalty in the utility function of the fiscal authorities. This is able to achieve the same desired result as fiscal policy co-ordination but without an explicit commitment to it.
|Date of creation:||Jun 1999|
|Date of revision:||Jun 1999|
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