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Macroeconomic Policy Interactions in the EMU: A Case for Fiscal Policy Co-ordination

  • Marco Catenaro

    ()

We analyse the effects of fiscal policy co-ordination in a monetary union on inflation, public expenditure 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, monetary policy commitment problems are mitigated. As a result, the optimal degree of conservatism of the central bank declines. 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.

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File URL: http://www.fahs.surrey.ac.uk/economics/discussion_papers/archive/surrec0003.pdf
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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0003.

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Date of creation: Aug 2000
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Handle: RePEc:sur:surrec:0003
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  1. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  2. Maurice Obstfeld and Kenneth Rogoff., 1995. "Exchange Rate Dynamics Redux," Center for International and Development Economics Research (CIDER) Working Papers C95-048, University of California at Berkeley.
  3. Peter Hoeller & Marie-Odile Louppe & Patrice Vergriete, 1996. "Fiscal Relations within the European Union," OECD Economics Department Working Papers 163, OECD Publishing.
  4. Levine, Paul & Pearlman, Joseph, 2001. "Monetary Union: The Ins and Outs of Strategic Delegation," Manchester School, University of Manchester, vol. 69(3), pages 285-309, June.
  5. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1998. "Monetary union without fiscal coordination may discipline policymakers," Journal of International Economics, Elsevier, vol. 45(2), pages 239-258, August.
  6. Barry Eichengreen & Jurgen von Hagen, 1996. "Fiscal Policy and Monetary Union: Is There a Tradeoff between Federalism and Budgetary Restrictions?," NBER Working Papers 5517, National Bureau of Economic Research, Inc.
  7. Beetsma, Roel & Uhlig, Harald, 1997. "An Analysis of the 'Stability Pact'," CEPR Discussion Papers 1669, C.E.P.R. Discussion Papers.
  8. Agell, Jonas & Calmfors, Lars & Jonsson, Gunnar, 1996. "Fiscal policy when monetary policy is tied to the mast," European Economic Review, Elsevier, vol. 40(7), pages 1413-1440, August.
  9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  10. Fischer, Stanley, 1995. "Central-Bank Independence Revisited," American Economic Review, American Economic Association, vol. 85(2), pages 201-06, May.
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