Generalized stability of monetary unions under regime switching in monetary and fiscal policies

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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 languageUndefined/Unknown
Pages (from-to)73-94
Number of pages22
JournalJournal of Money, Credit and Banking
Issue number1
Early online date29 Jun 2020
Publication statusPublished - Feb 2021

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