Structural Distortions and Decentralized Fiscal Policies in EMU
Roel M. W. J. Beetsma
University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute - Tinbergen Institute Amsterdam (TIA); Netspar
A. Lans Bovenberg
Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
CEPR Discussion Paper No. 2851
The combination of discretionary monetary policy, labour-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions. Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, country-specific debt targets must complement uniform debt ceilings in order to prevent decentralized fiscal authorities from employing debt policy strategically.
Number of Pages in PDF File: 66
Keywords: Discretionary monetary policy, wage rigidity, decentralized fiscal policy, monetary union, inflation targets, debt targets
JEL Classification: E52, E58, E61, E62
Date posted: June 26, 2001
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