Fiscal Discipline and Exchange Rate Systems

Matthew Canzoneri, Robert Cumby () and Behzad Diba

Economic Journal, 2001, vol. 111, issue 474, 667-90

Abstract: A new "fiscal" theory of price determination has implications for exchange rate systems and common currency areas. We show that deeper monetary integration requires the discipline of a Ricardian regime; that is, the government must guarantee fiscal solvency for any sequence of prices or exchange rates. Particularly striking results are that a currency peg is not credible without the discipline of a Ricardian regime, and a common currency area is not viable if fiscal policy in two (or more) of the countries in the union is Non-Ricardian. Interestingly, constraints written into the Maastricht Treaty are sufficient for a Ricardian regime.

Date: 2001
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:econjl:v:111:y:2001:i:474:p:667-90

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