Fiscal indiscipline and monetary policy in EMU: Is there any need for a fiscal policy concerned ECB?

Abstract

In this article we study the conduct of monetary policy by adopting a monetary union model in which we assume that, departing form the dominant literature, the central bank is directly concerned also about the national fiscal policies. The novelty of our analysis lies in fact that, on the basis of this assumption about the central bank's preferences, we evaluate its stabilisation effort under different scenarios of fiscal policy discipline and coordination in the union. We find that the level of conservativeness of the central bank decreases, while the presence of institutions and tools for the control and the coordination enforcement of fiscal policies are still required. Governments' lack of coordination reduces the fiscal policies stabilisation effort of the central bank, but it increases the monetary authority's reaction to supply shocks.