Working Paper: CEPR ID: DP418
Authors: Willem H. Buiter; Kenneth M. Kletzer
Abstract: This paper studies the likely consequences of monetary unification among the EC members for the conduct of fiscal policy in the EC countries (and by an emerging Federal European Fiscal Authority). Among the conclusions are the following. If the Eurofed is to be independent, the external exchange rate policy of the EC should be assigned to the Eurofed and not to the fiscal authorities. Effective (as opposed to formal) independence of the Eurofed is going to be very difficult to achieve. Coordinated upper ceilings on national public sector financial deficits are unnecessary and probably undesirable. Coordination of national public expenditure policies, tax policies and borrowing policies is in principle desirable for both efficiency and distributional reasons. The empirical models required for a serious welfare analysis of fiscal policy coordination do not yet exi.
Keywords: monetary union; fiscal policy coordination; externality
JEL Codes: 431; 432; 321; 325; 130
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Independence of the Eurofed (F36) | Control over external exchange rate policy (F31) |
| Control over external exchange rate policy (F31) | Impact on fiscal policy decisions across member states (E62) |
| Actions of national treasuries (H63) | Undermining independence of the Eurofed (E58) |
| Undermining independence of the Eurofed (E58) | Increased public sector deficits (H69) |
| Coordination of upper ceilings on national public sector financial deficits (H68) | Unnecessary and undesirable (Y50) |
| Fiscal policy coordination (F42) | Enhance efficiency and equity among member states (F55) |