An Analysis of the Stability and Growth Pact

Roel M. W. J. Beetsma · Harald Uhlig

352 citations0/0 files storedThe Economic Journal

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European Monetary and Fiscal Policies Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

We use a stylised model to analyse the Stability and Growth Pact for countries that have formed the European Monetary Union (EMU). In our model, shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully. Therefore, while governments have no incentive to sign a stability pact in the absence of a monetary union, they do so with monetary union to restrain this externality. With uncertainty, a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy. With differences in initial conditions, conflicts of interest arise. We study the Nash bargaining solution.

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References

1985The Optimal Degree of Commitment to an Intermediate Monetary Target 1991Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies 1990A Positive Theory of Fiscal Deficits and Government Debt 1992Central Bank Strategy, Credibility, and Independence: Theory and Evidence 1994A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy 1995The Political Economy of Central Bank Independence 1988Voting on the Budget Deficit 1995Price-level determinacy without control of a monetary aggregate

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