A Case for Fiscal Policy Co-ordination in Europe

Marco Catenaro
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Marco Catenaro: University of Turin

No 23, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: In this paper we analyse the impact of fiscal policy co-ordination in a monetary union on the size of the spending bias, inflation and the optimal degree of conservatism of the central bank. Our main result is that, when the fiscal authorities internalise the spillover effects originating from their loose fiscal stances, the size of the inflation bias decreases. As a result, the optimal degree of conservatism declines as well. Moreover, we show that the Stability Pact can be seen as an optimally designed linear penalty in the utility function of the fiscal authorities. This is able to achieve the same desired result as fiscal policy co-ordination but without an explicit commitment to it.

Keywords: EMU; Fiscal and Monetary Policy Co-ordination; Central Bank Independence; Stability and Growth Pact (search for similar items in EconPapers)
JEL-codes: E50 E58 E61 F15 (search for similar items in EconPapers)
Pages: 22 pages
Date: 1999-06, Revised 1999-06
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:23

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