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  5. Fiscal Backing for Price Stability in a Monetary Union

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Fiscal Backing for Price Stability in a Monetary Union

  • Bartosz Maćkowiak
  • Sebastian Schmidt
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

Fiscal backing is the idea that for the price level to be uniquely determined, fiscal policy must be active (as in Leeper, 1991) at least in some states of the world. We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Different combinations of national fiscal policies and a common fiscal policy with “Eurobonds” amount to active fiscal policy for the union. They all yield price level determinacy, but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy to provide fiscal backing reliably.

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