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The stability pact and feedback policy effects

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  • Jérôme Creel

    (Observatoire français des conjonctures économiques)

Abstract

We use a two-country dynamic model in a monetary union in which we introduce a wealth private behaviour. We study the implications of public debt on monetary and fiscal policies in the short and the long run. We analyse the effects of asymmetric fiscal policies in Euroland: the first country has fiscal room for manoeuvre whereas the second country is fettered by the Stability Pact. We show that such a situation creates two feedback effects which reduce the efficiency of economic policies. First, because of the inability of one government to implement an expansionist fiscal policy, the other government has to substitute for it in order to stabilise inflation and production. Second, the ECB’s involvement in macroeconomic stabilisation will also be exacerbated. The more substantial these effects, the more co-operation is needed between European governments and the ECB.

Suggested Citation

  • Jérôme Creel, 1999. "The stability pact and feedback policy effects," Sciences Po publications N°99-02, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/2841
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    References listed on IDEAS

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    1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
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    Cited by:

    1. Bruno Ducoudré, 2005. "Fiscal policy and interest rates," Documents de Travail de l'OFCE 2005-08, Observatoire Francais des Conjonctures Economiques (OFCE).

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    More about this item

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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