Within the discussion on how to implement fiscal discipline in the European Monetary Union, the adequacy of using the same fiscal rules for different MemberCountries has been challenged by some authors, calling for a temporary higher degree of fiscal flexibility in the case of small and less developed countries. We develop a model of a monetary union between two countries that may differ in (i)...

We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal ...

The introductory phase of the European Monetary Union (EMU) ended with the introduction of the euro currency in 2002. We present a review of the experiences with the new monetary union. Using a Taylor rule, we analyze the conduct of monetary policy by the European Central Bank (ECB). The empirical results suggest that the ECB applies similar weights to inflation and the output gap as the Bundes...

This paper examines the role of the monetary instrument choice for local equilibrium determinacy under sticky prices and different fiscal policy regimes. Corresponding to Benhabib et al.’s (2001) results for interest rate feedback rules, the money growth rate should not rise by more than one for one with inflation when the primary surplus is raised with public debt. Under an exogenous primary s...

The introductory phase of the European Monetary Union ended with the emission of euro currency in 2002. We present a review of the experiences with the new monetary union. Using a Taylor-rule, we analyze the ECB’s conduct of monetary policy. The empirical results suggests that the ECB applies similar weights to inflation and the output gap as the Bundesbank in the past, but more than proportion...

We develop a simple macroeconomic model where the time inconsistency of optimal monetary policy is due to tax distortions. If fiscal policy is exogenously fixed at its optimal level, a Walsh contract (Walsh, 1995) offered to an independent central bank implements the optimal monetary policy. When fiscal policy is determined endogenously, however, this contract is subject to strategic manipulati...

This paper considers how environmental policies should respond to macroeconomic downturns. It first explores the implications of the global economic downturn of 2008-09 for environmental policies, focusing in particular on the example of action against climate change. The arguments for and against activist fiscal policies in general are then reviewed, and the case made that a demand-induced dow...

Governments use national debt and the budget deficit as measures of fiscal position. But what should government policy aim to achieve with respect to these measures? Are these the right summary measures at which to be looking? This paper considers what the government should use as its fiscal targets to achieve policies that are consistent with long-term fiscal objectives. Among its findings are...

a r t i c l e i n f o This paper studies the monetary policy trade-off between low inflation and low sovereign risk in the environment where fiscal authorities fail to fully ensure the sustainability of government debt. Building on the Fiscal Theory of Price Level (FTPL) and the Fiscal Theory of Sovereign Risk (FTSR), this paper differs in its baseline assumption about the monetary policy objec...

This paper considers a search theoretic model of money in the tradition of Lagos and Wright (2005) where sellers can choose to produce in the formal or informal market. There is continuum of types of producers that differ in their managerial ability, as in Lucas span of control model. Producers in the formal market can make deposits and receive intererst payments, which makes credit possible fo...