Advertisement

Weltwirtschaftliches Archiv

, Volume 132, Issue 1, pp 28–54 | Cite as

Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?

  • Thomas Krichel
  • Paul Levine
  • Joseph Pearlman
Articles
  • 52 Downloads

Abstract

Fiscal and Monetary Policy in a Monetary Union: Credible Inflation Targets or Monetized Debt? —The paper examines the interrelationship between fiscal and monetary policy in a two-country monetary union. The worst scenario occurs when an independent central bank sets the nominal interest rate and responds to rising government debt/GDP ratios by monetization. The result is high inflation, high debt/GDP ratios and a large public sector. Government debt and inflation are contained if the governments bear sole responsibility for solvency, but the public sector remains excessively large. The best scenario occurs if the central bank removes the incentive for the governments to engineer surprise inflation by credible inflation targeting.

E52 E62 F15 F33 

Zusammenfassung

Finanz-und Geldpolitik in einer Währungsunion -Glaubhafte Inflationsziele oder monetisierte Staatsverschuldung? —Die Verfasser untersuchen die Beziehung zwischen Finanz-und Geldpolitik in einer Währungsunion von zwei Ländern. Das schlechteste Szenario liegt vor, wenn eine unabhängige Zentralbank den nominalen Zinssatz festlegt und auf einen Anstieg der Staatsverschuldung (im Verhältnis zum BIP) mit Monetisierung reagiert. Das Ergebnis ist hohe Inflation, ein ungünstiges Verhältnis zwischen Staatsschulden und BIP und ein aufgeblähter öffentlicher Sektor. Staatsschulden und Inflation werden gebremst, wenn die Regierungen die alleinige Verantwortung für die Solvenz tragen, aber der öffentliche Sektor übertrieben groß bleibt. Das beste Szenario ist gegeben, wenn die Zentralbank den Regierungen den Anreiz nimmt, überraschende Inflationen zu inszenieren, indem sie in ihrer Politik glaubwürdige Inflationsziele verfolgt.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. al-Nowaihi, A., and P. L. Levine (1994). Can Reputation Resolve the Monetary Policy Credibility Problem?Journal of Monetary Economics 33 (2): 355–380.CrossRefGoogle Scholar
  2. Barro, R. J., and D. Gordon (1983). Rules, Discretion and Reputation in a Model of Monetary Policy.Journal of Monetary Economics 12 (1): 101–121.CrossRefGoogle Scholar
  3. Blanchard, O. J. (1985). Debt, Deficits and Finite Horizons.Journal of Political Economy 93:223–247.CrossRefGoogle Scholar
  4. Buiter, W.H., and M. Kletzer (1991). The Welfare Economics of Cooperative and Uncooperative Fiscal Policy.Journal of Economic Dynamics and Control 15(1): 215–244.CrossRefGoogle Scholar
  5. Buiter, W. H., and U. R. Patel (1990). Debt, Deficits and Inflation: An Application to the Public Finance of India.Journal of Public Economics 47:171 -205.CrossRefGoogle Scholar
  6. Calvo, G.A., and M. Obstfeld (1988). Optimal Time-Consistent Fiscal Policy with Finite Lifetimes.Econometrica 56 (2):411–432.CrossRefGoogle Scholar
  7. Currie, D.A., and P. L. Levine (1993).Rules, Reputation and Macroeconomic Policy Coordination. Cambridge: Cambridge University Press.Google Scholar
  8. Currie, D. A., P. L. Levine, and J. Pearlman (1996). The Choice of Conservative Central Bankers in Open Economies.Economic Journal, forthcoming.Google Scholar
  9. Edley, M. (1994). Cost and Benefits of Moving from Low Inflation to Price Stability.OECD Economic Studies 23:109–130.Google Scholar
  10. Frenkel, J. A., and A. Razin (1987).Fiscal Policies in the World Economy. Cambridge, Mass.: MIT Press.Google Scholar
  11. Gaines, J., and P. L. Levine (1989). An Optimal Control Package for Multi-Country Rational Expectations Models Version I. CEF mimeo, London Business School.Google Scholar
  12. Kydland, F. W., and E. C. Prescott (1977). Rules Rather than Discretion: The Inconsistency of Optimal Plans.Journal of Political Economy 85: 474–491.CrossRefGoogle Scholar
  13. Levine, P. L. (1993). Fiscal Policy Coordination under EMU and the Choice of Monetary Instrument.Manchester School of Economic and Social Studies 63:1–12.Google Scholar
  14. Levine, P. L., and A. Brociner (1994). Fiscal Policy Coordination and EMU: A Dynamic Game Approach.Journal of Economic Dynamics and Control 18 (3/4): 699–729.CrossRefGoogle Scholar
  15. Levine, P. L., and D. A. Currie (1987). Does International Macro-Economic Policy Coordination Pay and Is It Sustainable? A Two-Country Analysis.Oxford Economic Papers 39(1):38–74.Google Scholar
  16. Lucas, R. E., and N. L. Stokey (1983). Optimal Fiscal and Monetary Policy in an Economy without Capital.Journal of Monetary Economics 12 (1): 55–93.CrossRefGoogle Scholar
  17. Rogoff, K. (1985a). Can International Monetary Policy Coordination Be Counterproductive?Journal of International Economics 18:199–217.CrossRefGoogle Scholar
  18. — (1985b). The Optimal Degree of Commitment to an Intermediate Monetary Target.Quarterly Journal of Economics 100 (4): 1169–1189.CrossRefGoogle Scholar
  19. Sargent, T. I, and N. Wallace (1981). Some Unpleasant Monetarist Arithmetic.Federal Reserve Bank of Minneapolis Quarterly Review 5 (3): 1–17.Google Scholar
  20. Shoven, J. B., and J. Whalley (1992).Applying General Equilibrium. Cambridge: Cambridge University Press.Google Scholar
  21. Yaari, M. E. (1965). Uncertain Lifetime, Life Insurance, and the Theory of the Consumer.Review of Economic Studies 32:137–150.CrossRefGoogle Scholar

Copyright information

© Institut für Weltwirtschaft an der Universität Kiel 1996

Authors and Affiliations

  • Thomas Krichel
  • Paul Levine
  • Joseph Pearlman

There are no affiliations available

Personalised recommendations