Inflation divergence and public deficits in a monetary union

Jerome Creel () and Jacques Le Cacheux ()

No 2003-05, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: We reconsider the link between domestic public debts and average and domestic inflation rates in a monetary union, using a modified version of a model by Beetsma and Vermeylen (2002). It is thus possible to show that the causation between the inflation dynamics and the public finances might go from the former to the latter. We are thus able to tackle the issue of persistently divergent inflation rates within the euro area. We also demonstrate that the homogeneous fiscal rules defined in the Stability and Growth Pact are ill-suited and might even be counterproductive. This conclusion is all the more true as the EU is on the eve of enlargement towards the CEECs: our results show that imposing homogeneous fiscal rules to the CEECs may prove disruptive.

Keywords: inflation; public debt; monetary union; fiscal rule (search for similar items in EconPapers)
JEL-codes: E42 E62 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-mac and nep-mon
Date: 2003
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Persistent link: http://EconPapers.repec.org/RePEc:fce:doctra:0305

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