Macroeconomic Policy Interactions in the EMU: A Case for Fiscal Policy Co-ordination

Marco Catenaro ()

School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: We analyse the effects of fiscal policy co-ordination in a monetary union on inflation, public expenditure 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, monetary policy commitment problems are mitigated. As a result, the optimal degree of conservatism of the central bank declines. 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)
Date: 2000-08
New Economics Papers: this item is included in nep-mon, nep-pbe, nep-pol and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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