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Our Research Catalogue contains grants and outputs data up until April/May 2014.

New Directions in Monetary and Fiscal Policy Analysis at the Macroeconomic Level

Grant reference: RES-062-23-1436

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Journal article details

Discretionary policy in a monetary union with sovereign debt
This paper examines the interactions between multiple national fiscal policymakers and a single monetary policy maker in response to shocks to government debt in some or all of the countries of a monetary union. We assume that national governments respond to excess debt in an optimal manner, but that they do not have access to a commitment technology. This implies that national fiscal policy gradually reduces debt: the lack of a commitment technology precludes a random walk in steady-state debt, but the need to maintain national competitiveness avoids excessively rapid debt reduction. If the central bank can commit, it adjusts its policies only slightly in response to higher debt, allowing national fiscal policy to undertake most of the adjustment. However, if it cannot commit, then optimal monetary policy involves using interest rates to rapidly reduce debt, with significant welfare costs. We show that in these circumstances the central bank would do better to ignore national fiscal policies in formulating its policy.
10.1016/j.euroecorev.2010.11.007
English

Primary contributor

Author Campbell Leith

Additional contributors

Co-author Simon Wren-Lewis

Additional details

55
1
Yes
0014-2921
Elsevier
01 January 2011
93-117
Amsterdam, Netherlands
Post-print
European economic review

Cite this outcome

Harvard

Leith, Campbell and Wren-Lewis, Simon (2011) Discretionary policy in a monetary union with sovereign debt. European economic review. 55 (1), pp. 93-117 Amsterdam, Netherlands: Elsevier.

Vancouver

Leith Campbell and Wren-Lewis Simon. Discretionary policy in a monetary union with sovereign debt. European economic review 2011; 55 (1): 93-117.