6533b7d0fe1ef96bd125af44

RESEARCH PRODUCT

Deficit sustainability and inflation in EMU: An analysis from the Fiscal Theory of the Price Level

Vicente EsteveCarmen Díaz-roldánOscar Bajo-rubio

subject

InflationMacroeconomicsEconomics and EconometricsFiscal imbalanceInflation targetingjel:E62media_common.quotation_subjectMonetary policyjel:H62Monetary economicsFiscal Theory of the Price Level monetary and fiscal dominance central bank independence fiscal solvency inflationFiscal unionFiscal policyjel:O52Political Science and International RelationsFiscal theory of the price levelEconomicsPrice levelmedia_common

description

Price determination theory typically focuses on the role of monetary policy, while the role of fiscal policy is usually neglected. From a different point of view, the Fiscal Theory of the Price Level takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. In this paper we try to test empirically whether the time path of the government budget in EMU countries would have affected price level determination. Our results point to the sustainability of fiscal policy in all the EMU countries but Finland, although no firm conclusions can be drawn about the prevalence of either monetary or fiscal dominance.

yearjournalcountryeditionlanguage
2007-04-01European Journal of Political Economy
https://doi.org/10.1016/j.ejpoleco.2009.04.001