Financial Stability and Fiscal Crises in a Monetary Union
IMF Working Papers, December 1, 2001
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- Financial Stability and Fiscal Crises in a Monetary Union
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Bibliographic details
- Authors: Samir Jahjah
- Published: December 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451874358.001
Summary and central findings
- The main tasks of central banks are to secure price and financial stability.
- In crises, these objectives can conflict, 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.
- The paper offers a simple theoretical model that captures the trade-off between price stability and financial stability.
- Different fiscal institutions are compared to evaluate their impact on the conduct of monetary policy.
- 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.
Policy implications and institutional analysis
- Fiscal criteria and mechanisms can influence the central bank’s trade-off between price and financial stability in a monetary union.
- Comparing fiscal institutions sheds light on how rules like those in the Maastricht Treaty and the Pact for Stability and Growth affect monetary policy choices during crises.
- Effective fiscal mechanisms can reduce the likelihood of central bank financing of fiscal deficits and the associated inflationary risk.
Subject classification and keywords
- Subject: Banking, Fiscal policy, Inflation, Monetary unions, Price stabilization
- Keywords: central bank, WP