Fiscal policy interaction in the EMU

This paper studies the interaction of fiscal stabilization policies in the Economic and Monetary Union (EMU). The "Excessive Deficits" Procedure of the Maastricht Treaty and its elaborations in the recent "Stability and Growth Pact" introduce a set of fiscal stringency requirements. Situations might arise where the need for fiscal flexibility and the fiscal stringency requirements will create a conflict and suboptimal macroeconomic policies are implemented. Macroeconomic adjustment under non-cooperative and cooperative fiscal policy design in the EMU is analyzed and compared. In addition it is analyzed how fiscal stringency requirements like the Stability and Growth Pact affect fiscal policy design under EMU. Copyright (C) 1998 IFAC.