Generalized Stability of Monetary Unions Under Regime Switching in Monetary and Fiscal Policies

Dennis Bonam, Bart Hobijn

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish (US)
JournalJournal of Money, Credit and Banking
DOIs
StateAccepted/In press - 2020
Externally publishedYes

Keywords

  • equilibrium stability and uniqueness
  • Markov switching
  • monetary union
  • monetary–fiscal interactions

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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