Monetary and debt-concerned fiscal policies interaction in monetary unions

In this paper a monetary union model with debt-concerned fiscal authorities is presented. Under this circumstance it is assumed that monetary policy is implemented on the basis of union-average data, while in each member country fiscal policies are conducted on the basis of national data. It is shown that in this setup the effects of macroeconomic shocks on national debts and deficits are heterogeneous across countries and a country by country analysis is needed. Moreover, the gap between the debt in a single member country and its union average turns out to be a key element, more than the level of debt itself. Countries with a debt above the union average do not attain the targets and different equilibrium levels of debt can endanger the existence of the union. © 2014, Springer-Verlag Berlin Heidelberg.