Monetary and Fiscal Policy Interactions Under a Stability Pact

Fiscal Rules Conference, p. 279, 2001

40 Pages Posted: 28 Jun 2012

See all articles by Marco Buti

Marco Buti

European Commission, DG II

Werner Roeger

European Commission, DGECFIN; European Commission

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Date Written: February 1, 2001

Abstract

The paper analyses in a simple setting a game between an inflation-conservative central bank and a fiscal authority subject to an upper limit on the budget deficit. It is shown that complementarity or substitutability between the policies and the preference of each authority for the other authority's behaviour crucially depends on the type of shock hitting the economy. If the government attempts to stimulate output beyond its natural level, a "deficit bias" emerges under non-cooperation; under cooperation, the equilibrium is characterised by both a "deficit bias" and an "inflation bias". However, if the government only pursues cyclical stabilisation these biases disappear and there are positive gains from coordinating the policy responses to shocks.

JEL Classification: E61, E63, H6

Suggested Citation

Buti, Marco and Roeger, Werner and Roeger, Werner and in 't Veld, Jan, Monetary and Fiscal Policy Interactions Under a Stability Pact (February 1, 2001). Fiscal Rules Conference, p. 279, 2001, Available at SSRN: https://ssrn.com/abstract=2094498

Marco Buti (Contact Author)

European Commission, DG II ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium
+32 2 296 2246 (Phone)
+32 2 299 3505 (Fax)

Werner Roeger

European Commission, DGECFIN ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

European Commission ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

CHAR 14/245
Brussels, Bruxelles B-1049
Belgium
(32 2) 2993 577 (Phone)
(32 2) 2957 499 (Fax)

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