An Analysis of the "Stability Pact"

CEPR Discussion Paper Series Number 1669

Posted: 27 Jan 1998

See all articles by Roel M. W. J. Beetsma

Roel M. W. J. Beetsma

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); European Commission; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute); Tinbergen Institute; Netspar

Harald Uhlig

University of Chicago - Department of Economics

Date Written: July 1997

Abstract

We analyze the proposed "stability pact" for countries joining a European Monetary Union (EMU). Within EMU short-sighted governments fail to fully internalize the inflationary consequences of their debt policies, which results in excessive debt accumulation. Hence, although in the absence of EMU governments have no incentive to sign a stability pact, within EMU they prefer a stability pact which punishes excessive debt accumulation. With idiosyncratic shocks to governments' budgets, EMU combined with an appropriately designed stability pact will be strictly preferred to autonomy. While the stability pact corrects the average debt bias, inflation, which is attuned to the Union-average debt level, is more stable.

JEL Classification: E58, E60, E61, E63, F33, F42

Suggested Citation

Beetsma, Roel M. W. J. and Uhlig, Harald, An Analysis of the "Stability Pact" (July 1997). CEPR Discussion Paper Series Number 1669, Available at SSRN: https://ssrn.com/abstract=56536

Roel M. W. J. Beetsma (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

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Tinbergen Institute ( email )

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Netspar ( email )

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Harald Uhlig

University of Chicago - Department of Economics ( email )

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Chicago, IL 60637
United States

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