Fiscal Policy when Monetary Policy is Tied to the Mast
1994 (English)Report (Other academic)
The paper analyses the time inconsistency problem of both exchange rate and fiscal policy in a small open economy. The equilibrium under discretion is characterised by inflation and a deficit. Commitment of the exchange-rate instrument only, e.g., through membership in a European monetary union with low inflation, contributes to price stability but increases the deficit. Whether the government will prefer this outcome to the discretionary one depends on the structure of the economy: commitment appears more favourable, the more open is the economy. The time-consistency arguments strengthen the case for simultaneous commitment of monetary and fiscal policy for inflation-prone countries joining a monetary union.
Place, publisher, year, edition, pages
Stockholm: IIES , 1994. , 37 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University, ISSN 0347-8769 ; 564
time inconsistency, discretion versus commitment, exchange rate policy, fiscal deficits, monetary union
IdentifiersURN: urn:nbn:se:su:diva-41888OAI: oai:DiVA.org:su-41888DiVA: diva2:342790