TITLE:
Discretionary Fiscal Policy and the European Monetary Union
AUTHORS:
Jason Jones
KEYWORDS:
Fiscal Policy; Policy Interaction; EMU
JOURNAL NAME:
Modern Economy,
Vol.3 No.6,
October
31,
2012
ABSTRACT: A model of circumstances that can lead to changes in the way a fiscal authority conducts policy after joining a monetary union is presented and empirically tested for the euro area. According to the model consolidation fatigue, shock asymmetry, or differences in the relative weight placed on output/price stabilization between the new and old monetary authority can lead to greater reliance on fiscal policy. Empirical evidence suggests that there has been a change in the conduct of fiscal policy in the euro area which is most likely due to consolidation fatigue and a stronger emphasis on price stabilization by the European Central Bank.