 The “Benefits” of being small: Loose fiscal policy in the European Monetary UnionLamar Crombach, Frank Bohn and Jan-Egbert Sturm Journal of Public Economics, 2024, vol. 234, issue C Abstract: Independent central banks typically counteract positive fiscal shocks that would otherwise increase the inflation rate above the target. In a theoretical model, we show that, in a monetary union, this mechanism implies weaker responses to national fiscal shocks because the overarching central bank must account for the fiscal policies of all members. The model highlights that the response is especially weak for small members, given their marginal impact on the union’s aggregate inflation rate. Empirically, we exploit the exogenous variation in elections to show that the European Central Bank reacts more vigorously to fiscal shocks from larger countries. We then provide evidence that small countries take advantage of this; they engage more in fiscal expansions during election years than large countries. In an extension, we discuss, both theoretically and empirically, why the difference between small and large countries disappears in times of crisis. Keywords: Common monetary policy; Central bank independence; Country size; Elections; Forward-looking Taylor rule; Political budget cycle (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:234:y:2024:i:c:s0047272724000562 DOI: 10.1016/j.jpubeco.2024.105120 Access Statistics for this article Journal of Public Economics is currently edited by R. Boadway and J. Poterba More articles in Journal of Public Economics from Elsevier |
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