Fiscal Policy, intercountry adjustment and the real exchange rate within Europe

Christopher Allsopp and David Vines

No 344, European Economy - Economic Papers 2008 - 2015 from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: In EMU, a country may have difficulty ensuring stability in the face of asymmetric shocks; the response may be unstable, or, even if not, the real exchange rate might overshoot. Fiscal policy may help to stabilise inflation and also to target the real exchange rate. The paper argues that an improved fiscal policy process might result in improved macroeconomic performance within Europe. Within EMU, a country may have difficulty ensuring stability in the face of asymmetric shocks; the response may be unstable, or, even if not, the real exchange rate might overshoot. In this context, the rules of the SGP may interfere with the control of inflation control, with the short-run stabilisation of demand, and also with the longer term adjustment of intra-European real exchange rates. We recommend using fiscal policy to stabilise inflation and also to target the real exchange rate rather than deficits or debt. Such a policy would require a more active use of fiscal policy.

Keywords: adjustment; macroeconomic stability; fiscal policy; EMU; "Fiscal policy; intercountry adjustment and the real exchange rate within Europe"; Allsopp; Vines (search for similar items in EconPapers)
JEL-codes: E52 E61 E63 F41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2008-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:euf:ecopap:0344

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