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The monetary and fiscal framework of the EMU in times of high debt and constrained interest rates

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  • Ian Hurst
  • Iana Liadze
  • Jack Meaning

Abstract

This paper looks at the monetary and fiscal interaction in the European Monetary Union and how the two arms of macrostabilisation policy are affected by high levels of sovereign debt and short-term interest rates at, or around, their lower bound. Using the National Institute’s Global Econometric Model it shows that when one arm of policy is constrained then the other must do more work to act as a partial, yet imperfect substitute. With both binding fiscal constraints and short-term interest rates near the lower bound, monetary intervention in sovereign debt markets offers a channel by which to ease the monetary stance and simultaneously relax the fiscal budget constraint. When only a subset of the monetary union is fiscally constrained, a domestic fiscal expansion by the remaining unconstrained members can provide a cross-country intra-union offset that makes all member states better off than they otherwise would be.

Suggested Citation

  • Ian Hurst & Iana Liadze & Jack Meaning, 2016. "The monetary and fiscal framework of the EMU in times of high debt and constrained interest rates," National Institute of Economic and Social Research (NIESR) Discussion Papers 467, National Institute of Economic and Social Research.
    • Handle: RePEc:nsr:niesrd:467
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    1. Aleksandra Fedajev & Danijela Pantović & Isidora Milošević & Tamara Vesić & Aleksandra Jovanović & Magdalena Radulescu & Maria Cristina Stefan, 2023. "Evaluating the Outcomes of Monetary and Fiscal Policies in the EU in Times of Crisis: A PLS-SEM Approach," Sustainability, MDPI, vol. 15(11), pages 1-14, May.

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