ABSTRACT
The chapter analyses the interaction between the monetary policy and national fiscal policies, taking into account the institutional design of the Economic and Monetary Union: the monetary authority faces the traditional macroeconomic trade-off between price and output stability and national governments have the objective of debt stabilisation. The primary fiscal balance is found to positively depend on the policy rate; consequently, the government can devote more resources to pursue the objective of output stability. The main propositions of the model for the period from 2000 to 2019 are tested. The relationship between primary fiscal balance and policy rate for each broader economy in the Economic and Monetary Union (EMU) and a balanced panel data representing the whole economy of the EMU are estimated. Notably, a U-shaped relationship, independently of the debt level is detected. Before the sovereign debt crisis, an expansionary monetary policy was related to accommodative fiscal policies; the opposite occurred after the crisis when the policy rate was lower than the threshold value. Finally, a reasonable explanation of this turnaround that European governance has pushed national fiscal authorities to implement a sub-optimal fiscal policy is proposed.
