Interactions between Monetary and Fiscal Policy Rules

Posted: 19 Nov 2000

See all articles by Simon Wren-Lewis

Simon Wren-Lewis

University of Oxford - Economics Department

Campbell Leith

University of Glasgow - Department of Economics

Abstract

The Fiscal Stability Pact for EMU implies that constraints on fiscal policy facilitate inflation control. In this paper we identify two stable policy regimes. When monetary policy seeks to raise real interest rates in response to excess inflation, a self-stabilising fiscal policy is required to ensure model stability. A fiscal policy which does not, by itself, ensure fiscal solvency constrains monetary policy to be relatively 'passive'. However, in simulations we conclude that the central bank does not need to seek, on this account, the degree of debt stabilisation that appears to be implied by the fiscal stability pact.

JEL Classification: E62

Suggested Citation

Wren-Lewis, Simon J.Q. and Leith, Campbell, Interactions between Monetary and Fiscal Policy Rules. Available at SSRN: https://ssrn.com/abstract=233407

Simon J.Q. Wren-Lewis (Contact Author)

University of Oxford - Economics Department ( email )

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Campbell Leith

University of Glasgow - Department of Economics ( email )

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