Fiscal policy effectiveness and neutrality results in a non-Ricardian world

Arbeitspapier

The paper introduces monetary and fiscal regimes into a Blanchard-Weil overlapping generations model. Contrary to intuition, it is shown that fiscal policy becomes more effective, the less the central bank monetises government debt. Furthermore, there is a degree of debt monetisation at which Ricardian equivalence seems to hold in this 'non-Ricardian' model, as fiscal policy is neutral with respect to agent's net wealth. At the origin of these results are the opposite intergenerational wealth effects of money and debt financing. Since, on average, central bank independence increased through EMU, the analysis suggests that fiscal policy might have become a more powerful instrument for euro-area countries. It is further argued that given the Stability and Growth Pact, governments will find it wise to run budget positions 'close to balance or in surplus' in order to maintain the increased fiscal policy effectiveness.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 3

Classification and Topics

• Classification: Wirtschaft ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
• Subject: fiscal policy effectiveness

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Detken, Carsten
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 1999

Further information

• Handle: http://hdl.handle.net/10419/152437
• Last update: 10.03.2025, 11:43 AM CET