An Analysis of the 'Stability Pact'

Roel Beetsma and Harald Uhlig ()

No 1669, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse the proposed ‘stability pact’ for countries joining a European Monetary Union (EMU). Within EMU shortsighted governments fail to fully internalize the inflationary consequences of their debt policies, which results in excessive debt accumulation. Hence, although in the absence of EMU governments have no incentive to sign a stability pact, within EMU they prefer a stability pact which punishes excessive debt accumulation. With idiosyncratic shocks to governments’ budgets, EMU combined with an appropriately designed stability pact will be strictly preferred to autonomy. While the stability pact corrects the average debt bias, inflation, which is attuned to the Union-average debt level, is more stable.

Keywords: Debt Policy; European Monetary Union; Inflation; Monetary Policy; Political Distortions; Stability Pact (search for similar items in EconPapers)
JEL-codes: E58 E60 E61 E63 F33 F42 H63 (search for similar items in EconPapers)
Date: 1997-07
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Citations: View citations in EconPapers (14)

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Related works:
Working Paper: An Analysis of the Stability Pact (1997)
Working Paper: An Analysis of the Stability Pact (1997)
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