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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.
|Glasgow Author(s):||Leith, Prof Campbell|
|Authors:||Leith, C., and Wren-Lewis, S.|
|Subjects:||H Social Sciences > HB Economic Theory|
|College/School:||College of Social Sciences > Adam Smith Business School > Economics|
|Journal Name:||Economic Journal|
|Published Online:||25 December 2001|