Strategic interactions between monetary and fiscal policies: a case study for the European Stability Pact

Abstract : Our main objective here is to assess the macroeconomic incidence of this peculiar fiscal setting when countries in the Euro area face symmetric shocks. Though these shocks are more easily circumvented than asymmetric shocks - the ECB should be able to stabilise the economy without fiscal policies -, uncoordinated policies with one government following a balanced-budget rule may be very counter-productive for the ECB and for the government with sound public finances. This thus gives a new argument in favour of coordinated monetary and fiscal policies.