Structural Distortions and Decentralized Fiscal Policies in EMU

Roel Beetsma and Lans Bovenberg

No 2851, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The combination of discretionary monetary policy, labour-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions. Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, country-specific debt targets must complement uniform debt ceilings in order to prevent decentralized fiscal authorities from employing debt policy strategically.

Keywords: Discretionary monetary policy; Wage rigidity; Decentralized fiscal policy; Monetary union; Inflation targets; Debt targets (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 E62 (search for similar items in EconPapers)
Date: 2001-06
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Structural distortions and decentralized fiscal policies in EMU (2005)
Working Paper: Structural Distortions and Decentralized Fiscal Policies in EMU (2001)
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