Credibility, Seigniorage and Government Debt in a Monetary Union

Abstract

In the debate on the European Monetary Union (EMU) one major issue is the fiscal rules of the Maastricht Treaty which impose ceilings on the government debt and deficits of the countries joining the EMU. There now exists a large body of literature on the potential benefits and costs of these debt rules: see, for example, Buiter et al. (1993) for a survey. One important question in this discussion is, of course, whether these debt rules are needed to prevent excessive inflation in a monetary union. While some contributions — for example Aizenman (1992), and van der Ploeg (1991) — support this view,² other authors — for example Beetsma and Bovenberg (1995a,b) — have argued that these debt rules are unnecessary or may even be counterproductive in the sense that they will raise inflation in the union.

Helpful comments by Guillermo Calvo, Alberto Giovannini, Günter Krause, Ray Rees, Assaf Razin and Wolfram Richter on earlier drafts of this paper are gratefully acknowledged. Finally, I have to thank Florian Wöhlbier for preparing the final version of the manuscript The usual disclaimer applies