Inflation Targets and Debt Accumulation in a Monetary Union

R.M.W.J. Beetsma, A.L. Bovenberg

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Abstract

This paper explores the interaction between centralized monetary policy and decentralized fiscal policy in a monetary union. Discretionary monetary policy su¤ers from a failure to commit. Moreover, decentralized fiscal policymakers impose externalities on each other through the influence of their debt policies on the common monetary policy. These imperfections can be alleviated by adopting state-contingent in‡ation targets (to combat the monetary policy commitment problem) and shock-contingent debt targets (to internalize the externalities due to decentralized fiscal policy).
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages48
Volume1999-108
Publication statusPublished - 1999

Publication series

NameCentER Discussion Paper
Volume1999-108

Keywords

  • discretionary monetary policy
  • decentralized fiscal policy
  • monetary union
  • in‡ation targets
  • debt targets

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