The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsiste...

We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain ...

The objective of this study is to investigate the behaviour of monetary and fiscal authorities in the Euro area. Our main contribution is joint modelling of behaviour of the two authorities. Our investigation highlights a number of facts. The systematic monetary policies adopted by the non-German authorities in the seventies were not capable of stabilizing inflation. Such results has been achie...

The U.S. federal government is facing the prospect of exponentially rising entitlement obligations that are threatening to push the debt-to-GDP ratio to historically unparalleled levels. In an effort to understand the economic consequences of these projected debt run-ups, this paper takes a stand on how future policy must adjust and examines its implications for the aggregate economy. Assuming ...

In the early postwar years, during the heyday of fiscal fine-tuning, monetary policy was not widely considered a particularly interesting or important topic. The predominant view was that the main function of monetary policy was to “stimulate” debt-financed purchases by keeping interest rates low. Inflation was first considered a useful lubricant to be traded for lower unemployment, and inflati...