Abstract
The interaction between monetary policy, government budget deficits, and inflation is examined for the four largest Western European economies, comprising France, Italy, the United Kingdom and West Germany. In order to assess the possible impact of US macroeconomic policy, past US monetary base growth, deficits and inflation rates are included in the set of explanatory variables for each of the European countries. Empirical results for the 1962:2–1985:4 sample period reveal interplay between domestic monetary and fiscal policy to be augmented by a significant impact of the US variables across all four countries in the sample.
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