The European Stability Pact and Feedback Policy Effects

Creel, Jérôme

doi:2002.17.3.570

The Journal of Economic Integration 2002 September;17(3) :570-595.
DOI: https://doi.org/10.11130/jei.2002.17.3.570

The European Stability Pact and Feedback Policy Effects

Jérôme Creel,

Observatoire Françis des Conjonctures Economiques

ABSTRACT

With a two-country dynamic model in a monetary union with wealth private behaviors, we study the implications of public debt on monetary and fiscal policies. The model used has Keynesian features in the short run and Wicksellian ones in the long run. We analyse the effects of asymmetric fiscal policies in Euroland and show that such a situation creates two feedback effects which reduce the efficiency of economic policies. First, because of the inability of one government to implement an expansionary fiscal policy, the other government has to substitute for it to reach economic targets. Second, the ECB's involvement in macroeconomic stabilisation will be exacerbated. The more substantial these effects, the more coordination is needed between European governments and the ECB. JEL Classifications (E17, E63, H63)

Keywords: EMU | Stability and Growth Pact | Monetary Policy | Fiscal Policy | Public Debt