Monetary and Fiscal Policies in EMU: some relevant issues

Carlos Vieira, Isabel Vieira () and Sofia Costa ()
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Sofia Costa: Departamento de Economia University of Évora

Eastward Enlargement of the Euro-zone Working Papers from Free University Berlin, Jean Monnet Centre of Excellence

Abstract: The coexistence in EMU of one common monetary policy and several domestic fiscal policies raises a number of problems of both academic and political interest. First, there are reasons to assess a hypothetical need to also centralise fiscal policies in such circumstances, according to what prevails in federal states. Second, given that this hypothesis has not reached consensus in the EU, nor is it expected to do so in the near future, the issue of how to co-ordinate monetary and fiscal policies, in order to achieve the desired outcomes in both global and individual terms, arises. Third, the fact that policy spill-overs are enhanced in the EMU, the need to avoid free riding behaviour on the part of member states and the apparent non-reliance on financial markets to discipline sovereign debtors led to the option of restricting the autonomy of domestic fiscal policies by setting up constraints upon the relative levels of deficits and debts. Due to these restrictions, it is important to investigate the existence of alternative options in case of economic shocks that are specific to an economic area, or that do not equally affect all EMU members. Theory suggests that financial markets, when integrated, can provide relief by supplying the means to finance recovery. However, the lack of integration, uncovered by empirical analyses especially in peripheral EU areas, indicates that financial markets cannot be fully relied upon as mechanisms of adjustment. The current study analyses these topics of interest for monetary and fiscal policies in EMU.

Keywords: Regional Input; Monetary and Fiscal Policies; EMU (search for similar items in EconPapers)
Pages: 37 pages
Date: 2003-03-01, Revised 2003-03-01
New Economics Papers: this item is included in nep-eec, nep-mac and nep-mon
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