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Generalized Stability of Monetary Unions Under Regime Switching in Monetary and Fiscal Policies
Author(s) -
BONAM DENNIS,
HOBIJN BART
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12699
Subject(s) - economics , commit , devaluation , fiscal policy , monetary economics , inflation (cosmology) , monetary policy , debt , order (exchange) , fiscal union , inflation targeting , macroeconomics , finance , currency , computer science , physics , database , theoretical physics
Earlier studies on the stability of monetary unions show that an inflation‐targeting central bank imposes strict budgetary requirements on fiscal policy to obtain a unique stable equilibrium. Failure of only one fiscal authority to meet these requirements already results in nonexistence of equilibrium. Nevertheless, it might prove useful to temporarily depart from such requirements in order to absorb country‐specific shocks. We show that such departures are feasible if fiscal authorities commit to switch to more sustainable fiscal regimes in the future. Debt devaluation and fiscal bailouts may also broaden the range of policy stances under which monetary unions are stable.