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Inflation divergence and public deficits in a monetary union

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Abstract

We reconsider the link between domestic public debts and average and domestic inflation rates in a monetary union, using a modified version of a model by Beetsma and Vermeylen (2002). It is thus possible to show that the causation between the inflation dynamics and the public finances might go from the former to the latter. We are thus able to tackle the issue of persistently divergent inflation rates within the euro area. We also demonstrate that the homogeneous fiscal rules defined in the Stability and Growth Pact are ill-suited and might even be counterproductive. This conclusion is all the more true as the EU is on the eve of enlargement towards the CEECs: our results show that imposing homogeneous fiscal rules to the CEECs may prove disruptive.

Suggested Citation

  • Jerome Creel & Jacques Le Cacheux, 2003. "Inflation divergence and public deficits in a monetary union," Documents de Travail de l'OFCE 2003-05, Observatoire Francais des Conjonctures Economiques (OFCE).
    • Handle: RePEc:fce:doctra:0305
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    Cited by:

    1. Eisenhauer, Joseph G., 2011. "The rich, the poor, and the middle class: Thresholds and intensity indices," Research in Economics, Elsevier, vol. 65(4), pages 294-304, December.

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    More about this item

    Keywords

    inflation; public debt; monetary union; fiscal rule;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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