Fiscal Backing for Price Stability in a Monetary Union

Bartosz Maćkowiak and Sebastian Schmidt

No 17034, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Fiscal backing is the idea that for the price level to be uniquely determined, fiscal policy must be active (as in Leeper, 1991) at least in some states of the world. We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Different combinations of national fiscal policies and a common fiscal policy with "Eurobonds" amount to active fiscal policy for the union. They all yield price level determinacy, but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy to provide fiscal backing reliably.

Keywords: Fiscal theory of the price level; Monetary union; Fiscal rules; Eurobonds (search for similar items in EconPapers)
JEL-codes: E31 E63 F45 (search for similar items in EconPapers)
Date: 2022-07
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