Control of the Public Debt: A Requirement for Price Stability?

Abstract

Reduction of government deficits and controlling the rate of growth of the outstanding public debt has moved to the forefront among the economic policy challenges facing many of the leading industrial nations in recent years. This has come to be of particular concern among the members of the European Union, nearly all of whom must modify their present courses if they are to satisfy the requirements laid down in the Maastricht treaty for participation in the proposed European monetary union. An obvious question raised by the fiscal requirements of the Maastricht treaty — and a pressing one, given the difficulties that many aspiring members of such a union face in satisfying these requirements — is why controls over the degree to which governments resort to deficit finance should be essential to a successful monetary union.²

I would like to thank Ben Bemanke, Michael Bordo, Guillermo Calvo, Michael Dotsey, Peter Kenen, William Perraudin, Julio Rotemberg, Erich Streissler, and Lars Svensson for helpful discussions, Eduardo Loyo for research assistance, and the National Science Foundation (US) for research assistance. I would also like to thank Bob King and Mark Watson for supplying the program described in King and Watson (1995).