Fiscal policy effectiveness and neutrality results in a non-Ricardian world

Carsten Detken

No 3, Working Paper Series from European Central Bank

Abstract: The paper introduces monetary and fiscal regimes into a Blanchard-Weil overlapping generations model. Contrary to intuition, it is shown that fiscal policy becomes more effective, the less the central bank monetises government debt. Furthermore, there is a degree of debt monetisation at which Ricardian equivalence seems to hold in this 'non-Ricardian' model, as fiscal policy is neutral with respect to agent's net wealth. At the origin of these results are the opposite intergenerational wealth effects of money and debt financing. Since, on average, central bank independence increased through EMU, the analysis suggests that fiscal policy might have become a more powerful instrument for euro-area countries. It is further argued that given the Stability and Growth Pact, governments will find it wise to run budget positions 'close to balance or in surplus' in order to maintain the increased fiscal policy effectiveness. JEL Classification: E63

Keywords: central bank independence; fiscal policy effectiveness; monetary and fiscal policy regimes; ricardian equivalence; Stability and Growth Pact (search for similar items in EconPapers)
Date: 1999-05
Note: 229418
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:19993

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