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Fiscal Rules in a Monetary Union: A Short-Run Analysis

Xavier Debrun ()

Open Economies Review, 2000, vol. 11, issue 4, 323-358

Abstract: This article challenges the conventional result according to which an instrument-independent central bank able to strictly commit to price stability makes fiscal constraints unnecessary. We present a model of a monetary union with heterogeneous members where the inefficient policy mix resulting from the lack of coordination between the common monetary policy and national fiscal policies incites the governments to appoint excessively “liberal” delegates to the central bank's board. We characterize the fiscal restraints necessary to restore the central bank's ability to deliver the most desirable degree of price stability. It appears that even country-specific and state-contingent restraints may be counterproductive for some member states. Copyright Kluwer Academic Publishers 2000

Keywords: European monetary union; delegation; stability pact (search for similar items in EconPapers)
Date: 2000
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