66 Pages Posted: 26 Jun 2001
Date Written: June 2001
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.
Keywords: Discretionary monetary policy, wage rigidity, decentralized fiscal policy, monetary union, inflation targets, debt targets
JEL Classification: E52, E58, E61, E62
Suggested Citation: Suggested Citation
Beetsma, Roel M. W. J. and Bovenberg, A. Lans, Structural Distortions and Decentralized Fiscal Policies in EMU (June 2001). CEPR Discussion Paper No. 2851. Available at SSRN: https://ssrn.com/abstract=275033
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