Working Paper: CEPR ID: DP1834
Authors: Paul de Grauwe
Abstract: In this paper we argue, first, that the Maastricht-inspired policy mix of monetary and fiscal restriction applied during the first half of the 1990s is, to a significant extent, responsible for the build-up of both the unemployment rate and the government debt to GDP ratios on the European continent. We also contrast this European policy mix with the one applied by the US authorities during the same period, and conclude that the US policy mix of fiscal restriction and monetary ease was more appropriate to reduce budget deficits and debt. Second, we evaluate the risk of the application of monetary and fiscal restriction in the future EMU. In this connection, we argue that the Stability Pact has transformed the 60% Maastricht debt criterion into a 0% debt criterion.
Keywords: monetary integration; Maastricht treaty; exchange rate
JEL Codes: F33; F36; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| restrictive policy mix (E63) | increase in unemployment rates (J64) |
| restrictive policy mix (E63) | increase in government debt-to-GDP ratios (H63) |
| high real interest rates (E43) | decreased aggregate demand (E20) |
| decreased aggregate demand (E20) | increase in unemployment (J64) |
| deflationary policy mix (E63) | low growth environment (O44) |
| low growth environment (O44) | increase in unemployment (J64) |
| restrictive policies (J18) | future deflation in the EMU (E66) |
| monetary authorities responsibility (E58) | stabilize aggregate demand (E00) |