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Structural Distortions and Decentralized Fiscal Policies in EMU
- Journal of Money, Credit, and Banking
- The Ohio State University Press
- Volume 37, Number 6, December 2005
- pp. 1001-1018
- 10.1353/mcb.2006.0001
- Article
- Additional Information
The combination of discretionary monetary policy, labor-market distortions, and nominal wage rigidity yields excessive inflation as monetary policy tries to exploit nominal wage contracts to address labor-market distortions. An inflation target reduces inflation, but creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. Preventing the associated excessive accumulation of public debt calls for debt ceilings. If countries differ substantially in terms of structural distortions, uniform debt ceilings must be complemented by country-specific debt targets in order to prevent decentralized fiscal authorities from employing debt policy strategically.