Price stability in a monetary union / Stefania Piffanelli

From the fiscal and monetary criteria indicated in the Maastricht Treaty, it appears that its architects were concerned with the risks of price instability and excessive public debt within the European Monetary Union. The goal of price stability is unanimously regarded as a solid principle for the success of the union. Several criticisms have been voiced over the years against the fiscal criteria. It is not clear, firstly, whether fiscal coordination is at all necessary for price stability but, secondly, also whether the fiscal criteria of the Treaty are best suited for this purpose. The paper analyzes whether coordination of fiscal policies within the union is necessary for price stability. The analysis is conducted using a standard general equilibrium model representing a monetary union with two countries featuring monopolistic competition and price rigidity. It turns out that some form of fiscal coordination is required for equilibria in which monetary policy alone is able to secure price stability.

[22] p. : graphs

Includes bibliographical references.