Essays on monetary and fiscal policy interaction: Applications to EMU and Eastern Europe

The interaction of monetary and fiscal policies encompasses much research material and covers a respectable area in theoretical macroeconomics. In this broad research field, three different focuses are discernible. A first line of research studies the dynamic interdependence of monetary and fiscal policy due to the dynamic government budget constraint. The second approach concentrates on the interaction of fiscal and monetary policy regarding the stabilisation of output fluctuations. Finally, a large amount of literature exists on the "public finance view of inflation" which treats monetary policy as part of the tax system which the authorities operate. This Ph.D. thesis develops a number of applications of the theory of monetary and fiscal policy interaction in the context of EMU and transition in Eastern Europe. The first three chapters model the problem of government debt stabilisation in EMU as a dynamic conflict between the fiscal and monetary authorities. A fourth chapter studies output stabilisation in EMU and develops a transfer system to stabilise the effects of asymmetric shocks. The remaining chapters study the "public finance view of inflation" and develop applications with respect to the design of monetary policy in the economies in transition and developing countries.