The Stability Pact and Feedback Policy Effects

Jerome Creel

No 1999-02, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: We use a two-country dynamic model in a monetary union in which we introduce a wealth private behaviour. We study the implications of public debt on monetary and fiscal policies in the short and the long run. We analyse the effects of asymmetric fiscal policies in Euroland: the first country has fiscal room for manoeuvre whereas the second country is fettered by the Stability Pact. We show that such a situation creates two feedback effects which reduce the efficiency of economic policies. First, because of the inability of one government to implement an expansionist fiscal policy, the other government has to substitute for it in order to stabilise inflation and production. Second, the ECB's involvement in macroeconomic stabilisation will also be exacerbated. The more substantial these effects, the more co-operation is needed between European governments and the ECB.

Keywords: monetary and fiscal policies; EMU; Stability Pact; fiscal theory of inflation; public debt. (search for similar items in EconPapers)
JEL-codes: E17 E63 H63 (search for similar items in EconPapers)
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Economic Integration, 17(3), September 2002.

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Working Paper: The stability pact and feedback policy effects (1999)
Working Paper: The stability pact and feedback policy effects (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:9902

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