This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good that sovereign debt shocks can undermine in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.
Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union / Canofari, P; Di Bartolomeo, G; Messori, M. - In: THE B.E. JOURNAL OF MACROECONOMICS. - ISSN 1935-1690. - 23:1(2023), pp. 151-180. [10.1515/bejm-2022-0038]
Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union
Canofari, P;
2023-01-01
Abstract
This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good that sovereign debt shocks can undermine in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.