How do European monetary and fiscal authorities behave?

The objective of this study is to investigate the behaviour of monetary and fiscal authorities in the Euro area. Our main contribution is joint modelling of behaviour of the two authorities. Our investigation highlights a number of facts. The systematic monetary policies adopted by the non-German authorities in the seventies were not capable of stabilizing inflation. Such results has been achieved in the eigthies and the nineties by anchoring more tightly domestic monetary policy to German monetary policy. All the main episodes of expansionary fiscal policy occurred in the course of the eigthies and the nineties in Europe cannot be explained by the sytematic behaviour of fiscal authorities. Stabilization of inflation has been achieved independently from the lack of fiscal discipline. There are important interactions between the two authorities but they depend exclusively on the responses of governemnts expenditures and receipts to interest rate payments on the public debt. JEL Classification numbers : E47, E62, E63 ∗ This paper was prepared for the Workshop on ”Monetary and fiscal interactions in EMU” organized by the European Commission. I thank my discussant, Werner Roeger, and conference participants for their comments. This draft also benefited from comments by the seminar audience at the Italian Ministry of Treasury and at the University of Rome. I thank Francesco Merli for his excellent research assistance. Financial Support from the European Commision is gratefully acknowledged.