DP1299 Does Monetary Unification Lead to Excessive Debt Accumulation?

Author(s): Roel Beetsma, A Lans Bovenberg
Publication Date: November 1995
Keyword(s): Common Central Bank, Credibility Effect, Government Myopia, Monetary Union, Optimal Debt Target, Price Stability Weight
JEL(s): E52, E58, E61, E62
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1299

If discretionary monetary policy implies an inflation bias, monetary unification boosts the accumulation of public debt. The additional debt accumulation is welfare reducing only if governments are sufficiently myopic. In the presence of myopic governments, debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allow a conservative, independent central bank to focus on price stability.