Fiscal and monetary policy interactions: lessons for revising the EU Stability and Growth Pact

Mark Setterfield

Journal of Post Keynesian Economics, 2009, vol. 31, issue 4, 623-643

Abstract: This paper explores the macroeconomic consequences of interactions between fiscal and monetary policy, in an environment characterized by endogenous money in which the interest rate is set exogenously by the central bank. Three "benchmark" interest rate operating procedures are identified, none of which presupposes that the main purpose of the central bank is to engage in inflation targeting. The paper then explores the consequences for macroeconomic performance (specifically, short-run growth and the rate of inflation) of activist fiscal policies designed to raise the short-run growth rate. The results provide insights into fiscal and monetary policy interactions in the sort of macroeconomic environment envisaged by some critics of the European Central Bank and the Stability and Growth Pact. In so doing, they provide lessons for those calling for fundamental reforms of both institutions.

Keywords: fiscal policy; monetary policy; Stability and Growth Pact (search for similar items in EconPapers)
Date: 2009
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