Working Paper

Fiscal policy in monetary unions: implications for Europe

Abstract: This paper analyzes how the feasible mix of government expenditure and financing arrangements may change with the establishment of a monetary union such as that planned by members of the European Community. We find that a monetary union reduces the feasible divergence across countries in their present discounted levels of fiscal spending. Wide differences across countries in their present and future time pattern of spending are still possible, however. Examination of the empirical evidence suggests that the movement towards greater exchange rate fixity associated with the EMS and participation in \"quasi\" monetary unions have not been accompanied by significant fiscal convergence. The experience of member states of several existing monetary unions, however, suggests that a more effective constraint to budgetary discipline arises within full-fledged unions in operation over long periods even in the absence of binding central rules on government deficit and debt positions.

Keywords: European Economic Community; Fiscal policy; Europe 1992; Economic and Monetary Union;

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1992

Number: 92-02