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An Analysis of the Stability Pact
Uhlig,H.F.H.V.S. Beetsma,R.M.W.J.
Uhlig,H.F.H.V.S.
Beetsma,R.M.W.J.
Abstract
We analyse the proposed "Stability Pact" for countries joining a European Monetary Union (EMU). In an EMU shortsighted governments fail to fully internalise the inflationary consequences of their debt policies. This results in excessive debt accumulation. Therefore, while in the absence of EMU governments have no incentive to sign a stability pact, under an EMU they prefer a stability pact which punishes excessive debt accumulation. With idiosyncratic shocks to the governments' budgets, an 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.
Description
Pagination: 25
Date
1997
Journal Title
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Volume Title
Publisher
Macroeconomics
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59.pdf
Adobe PDF, 421.81 KB
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Keywords
Stability Pact, European Monetary Union, political distortions, monetary policy, debt policy, inflation, E58 - Central Banks and Their Policies, E60 - General, H63 - Debt ; Debt Management ; Sovereign Debt, E61 - Policy Objectives ; Policy Designs and Consistency ; Policy Coordination, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy, F33 - International Monetary Arrangements and Institutions, F42 - International Policy Coordination and Transmission, SDG 17 - Partnerships for the Goals
Citation
Uhlig, H F H V S & Beetsma, R M W J 1997 'An Analysis of the Stability Pact' CentER Discussion Paper, vol. 1997-59, Macroeconomics, Tilburg.
License
info:eu-repo/semantics/restrictedAccess