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The research catalogue is an archive of ESRC-funded grants and outputs. Links, files and other content will no longer be maintained or updated after April 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.

Primary contributor

Author Campbell Leith

Additional contributors

Co-author Simon Wren-Lewis

Additional details

01 January 2011
Amsterdam, Netherlands
European economic review

Cite this outcome


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.


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