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.
Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Papers in Applied Economic Theory
Publication Date: 1992