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A Case for Fiscal Policy Co-ordination in Europe

Author

Listed:
  • Marco Catenaro

    (University of Turin)

Abstract

In this paper we analyse the impact of fiscal policy co-ordination in a monetary union on the size of the spending bias, inflation and the optimal degree of conservatism of the central bank. Our main result is that, when the fiscal authorities internalise the spillover effects originating from their loose fiscal stances, the size of the inflation bias decreases. As a result, the optimal degree of conservatism declines as well. Moreover, we show that the Stability Pact can be seen as an optimally designed linear penalty in the utility function of the fiscal authorities. This is able to achieve the same desired result as fiscal policy co-ordination but without an explicit commitment to it.

Suggested Citation

  • Marco Catenaro, 1999. "A Case for Fiscal Policy Co-ordination in Europe," Working Papers 23, University of Milano-Bicocca, Department of Economics, revised Jun 1999.
    • Handle: RePEc:mib:wpaper:23
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    File URL: http://repec.dems.unimib.it/repec/pdf/mibwpaper23.pdf
    File Function: First version, 1999
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    Cited by:

    1. Muhammad Farooq Arby & Muhammad Nadeem Hanif, 2010. "Monetary and Fiscal Policies Coordination: Pakistan’s Experience," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 6, pages 3-13.

    More about this item

    Keywords

    EMU; Fiscal and Monetary Policy Co-ordination; Central Bank Independence; Stability and Growth Pact;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F15 - International Economics - - Trade - - - Economic Integration

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