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Structural distortions and decentralized fiscal policies in EMU

Listed author(s):
  • Beetsma, R.M.W.J.
  • Bovenberg, A.L.

    (Tilburg University, School of Economics and Management)

The combination of discretionary monetary policy, labour-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions. Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, country-specific debt targets must complement uniform debt ceilings in order to prevent decentralized fiscal authorities from employing debt policy strategically.

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Paper provided by Tilburg University, School of Economics and Management in its series Other publications TiSEM with number ee72b086-d53f-4849-88ff-13417298f802.

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Date of creation: 2005
Publication status: Published in Journal of Money, Credit and Banking (2005), v.37, nr.6, p.1001-1018
Handle: RePEc:tiu:tiutis:ee72b086-d53f-4849-88ff-13417298f802
Contact details of provider: Web page: https://www.tilburguniversity.edu/about/schools/economics-and-management/

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