Working Paper: CEPR ID: DP17034
Authors: Bartosz Mackowiak; Sebastian Schmidt
Abstract: Fiscal backing is the idea that for the price level to be uniquely determined, fiscal policy must be active (as in Leeper, 1991) at leastin some states of the world. We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Different combinations of national fiscal policies and a common fiscal policy with "Eurobonds" amount to active fiscal policy for the union. They all yield price level determinacy, but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy to provide fiscal backing reliably.
Keywords: Fiscal Theory of the Price Level; Monetary Union; Fiscal Rules; Eurobonds
JEL Codes: E31; E63; F45
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| active fiscal policy (E63) | unique price level determination (D41) |
| passive monetary policy (E63) | indeterminate price levels (E30) |
| different combinations of national fiscal policies + common fiscal policy with eurobonds (E62) | price level determinacy (E30) |
| passive fiscal policy (E63) | cross-country wealth transfers (H87) |
| cross-country wealth transfers (H87) | permanent changes in consumption and relative prices (D11) |
| common fiscal authority + eurobonds + feedback rule for national surpluses (E62) | maintain price level determinacy (E31) |
| lack of coordination (P11) | high inflation in monetary union (F45) |