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Discussion Paper Details

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Title: Structural Distortions and Decentralized Fiscal Policies in EMU

Author(s): Roel Beetsma and A Lans Bovenberg

Publication Date: June 2001

Keyword(s): debt targets, decentralized fiscal policy, discretionary monetary policy, inflation targets, monetary union and wage rigidity

Programme Area(s): International Macroeconomics

Abstract: The combination of discretionary monetary policy, labour-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions. Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, country-specific debt targets must complement uniform debt ceilings in order to prevent decentralized fiscal authorities from employing debt policy strategically.

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Bibliographic Reference

Beetsma, R and Bovenberg, A. 2001. 'Structural Distortions and Decentralized Fiscal Policies in EMU'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2851