Fiscal and monetary policy on the way to EMU

Juergen von Hagen and Stefan Lutz

Open Economies Review, 1996, vol. 7, issue 4, 299-325

Abstract: We present the simulations of fiscal adjustment policies to the Maastricht criteria in the European economies based on a rational-expectations model of the G7 economies. We find that an effort to achieve the fiscal criteria inflicts pronounced recessions on the European economies. Furthermore, the fiscal and the inflation criteria lack consistency. A return to fixed exchange rates in Europe worsens the results of fiscal retrenchment in Europe. All of this implies that a “hard” interpretation of the criteria is neither a desirable nor a credible strategy for EMU. Copyright Kluwer Academic Publishers 1996

Date: 1996
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DOI: 10.1007/BF01886367

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