Working Paper: CEPR ID: DP3296
Authors: Harald Uhlig
Abstract: This Paper outlines some issues regarding the interaction of independent fiscal authorities and one central bank in the European monetary union. It points out the possibilities for coordination failures, ranging everywhere from potentially excessive deficits and free-riding problems to coordination failures in European fiscal or banking crises. As policy conclusions, some suggestions for institutional improvements are made. In particular, the Growth and Stability Pact needs strengthening rather than weakening. Furthermore, a solution for EMU-wide banking regulation needs to be found.
Keywords: banking crisis; EMU; fiscal crisis; fiscal policy; freeriding; monetary policy; monetary-fiscal policy interaction
JEL Codes: E50; E60; H00; H70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| independent fiscal authorities (H39) | excessive government deficits (H62) |
| freeriding on monetary policy (E49) | higher nominal interest rates (E43) |
| lack of coordination among fiscal authorities (H69) | worse economic outcomes (F69) |
| non-cooperative Nash equilibrium (C72) | worse outcomes for all member countries (F69) |
| cooperation among fiscal authorities (F42) | better economic stability (E60) |
| more countries in EMU (F36) | worse non-cooperative outcomes (C72) |
| coordination failures (P11) | potential for banking crises (F65) |
| lack of common supervisory framework (G38) | systemic risks across monetary union (F45) |