Financial Stability and Fiscal Crises in a Monetary Union

December 1, 2001

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Format: Chicago

Samir Jahjah. Financial Stability and Fiscal Crises in a Monetary Union, (USA: International Monetary Fund, 2001) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The main tasks of central banks are to secure price and financial stability. These objectives can, in times of crises, conflict with one another, and the central bank may have to renounce one of them in order to secure the other. In a monetary union, this trade-off can be exacerbated by the presence of highly indebted countries or by the risk of loose fiscal policies. This paper offers a simple theoretical model that captures the trade-off. Different fiscal institutions are compared in order to evaluate their impact on the conduct of monetary policy. More specifically, the fiscal criteria of the Maastricht Treaty and the Pact for Stability and Growth in Europe are analyzed in light of this model. Fiscal mechanisms exist to help prevent or minimize the risk of fiscal crises and the corresponding risk of central bank financing and inflation.

Subject: Banking, Fiscal policy, Inflation, Monetary unions, Price stabilization

Keywords: Central bank, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/201
Stock No:

WPIEA2001201
ISBN:

9781451874358
ISSN:

1018-5941

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