Effects of the European Economic and Monetary Union (EMU) on Taxation and Interest Spending of National Governments

Francesco Mongelli

No 1997/093, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the interest spending and taxation channels through which EMU could affect the public finances. It provides a framework for examining different views on a further narrowing of interest rate differentials. A model of Blanchard and Fischer is amended to analyze the two channels, and empirical evidence on the tax harmonization process is presented. The paper argues that “high-debt” and “high-tax” countries pursuing prudent fiscal policies could benefit the most from EMU: if monetary and widespread fiscal discipline are jointly established, interest rates could decline rapidly, while tax harmonization is likely to be gradual.

Keywords: WP; financial market; risk premium; discount rate; interest rate differential; economic integration; tax harmonization; joint analysis of monetary and fiscal policy; European Monetary Union; EMU member; devaluation risk premia; EU member; Government asset and liability management; Return on investment; Europe (search for similar items in EconPapers)
Pages: 36
Date: 1997-07-01
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1997/093

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