Fiscal Foundations of Price Stability in Open Economies

Abstract

A simple single-country model of price determination is displayed. The model captures the same basic ideas as other recent papers on the fiscal approach to analysis of determination of the price level but strips away some technical side issues by omitting money from the model. The model is then extended to deal with various versions of how a currency union--a single monetary authority interacting with multiple fiscal authorities--might operate. It connects this discussion to the debates over fiscal criteria for membership in the EMU. The main text of the paper works entirely with deterministic perfect-foresight continuous time models. An appendix discusses several examples of continuous time stochastic extensions of the models.

JEL Classification: F40, E42