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Two naked emperors? Concerns about the Stability & Growth Pact and second thoughts about central bank independence

Buiter, Willem H. (2004) Two naked emperors? Concerns about the Stability & Growth Pact and second thoughts about central bank independence. Fiscal Studies, 25 (3). pp. 249-277. ISSN 1475-5890

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Identification Number: 10.1111/j.1475-5890.2004.tb00539.x


This 2003 Institute for Fiscal Studies Lecture addresses two sets of issues relevant to current and prospective future E(M)U members: the consequences of the Stability and Growth Pact for fiscal-financial sustainability and macroeconomic stability, and some risks associated with operational independence of the central bank. The relevance of the second issue is not restricted to E(M)U members. Poor communication, co-operation and co-ordination between the fiscal and monetary authorities can be costly in two contingencies. The first of these occurs when the central bank’s role as the lender of last resort needs to be backed up by the willingness of the Treasury to recapitalise the central bank, should the need arise. The second contingency occurs when unwanted deflation needs to be prevented or combated, but the central bank’s conventional monetary arsenal is exhausted. Friedman’s helicopter drop of money, a temporary tax cut or transfer payment increase financed through the issuance of base money will always stimulate demand provided it is not expected to be reversed, in present value terms, in the future. In most real-world institutional/legal settings, – the implementation of a helicopter drop of base money requires co-ordinated actions by the central bank and Treasury. Central bank independence is unlikely to survive if either or both of these contingencies occur, if there is an ineffective response by the fiscal and monetary authorities and if this is blamed on lack of communication, co-operation or co-ordination.

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Additional Information: This is an electronic version of an Article published in Fiscal Studies 25 (3), 249-277© 2004 Blackwell Publishing. The definitive version is available at LSE has developed LSE Research Online so that users may access research output of the School. Copyright and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (<>) of the LSE Research Online website.
Divisions: European Institute
Subjects: H Social Sciences > H Social Sciences (General)
Date Deposited: 20 Jul 2006
Last Modified: 20 Jun 2021 01:34

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