Deficit sustainability and inflation in EMU: An analysis from the fiscal theory of the price level

Oscar Bajo-Rubio (), Carmen Diaz-Roldan () and Vicente Esteve
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Vicente Esteve: Universidad de Valencia

No 07-01, Working Papers from Spanish Chapter of the International Economics and Finance Society

Abstract: Price determination theory typically focuses on monetary plicy, while the role of fiscal policy is ussually neglected. From a different point of view, the Fiscal Theory of Price Level takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. In this paper we try to test empirically whether the time path of the government budget in EMU countries would have affected price level determination. Our results point to the sustainability of fiscal policy in all the EMU countries but Finland, although no firm conclusions can be drawn about the prevalence of either monetary or fiscal dominance.

Keywords: Fiscal Theory of the Price Level; monetary and fiscal dominance; central bank independence; fiscal solvency; inflation (search for similar items in EconPapers)
JEL-codes: E62 H62 O52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-pbe
Date: 2007-04

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Persistent link: http://EconPapers.repec.org/RePEc:aee:wpaper:0701

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