Alternative Monetary Policies and Fiscal Regime in New EU Members

I investigate the relevance of a fiscal regime for disinflation in new EU member states (NMS). I generalize the framework of Obstfeld and Rogoff (1995) to incorporate the non-Ricardian fiscal regime and two monetary feedback rules: inflation targeting and depreciation targeting. Euro accession requires disinflation and stabilization of the exchange rate and thus restrictive monetary policy. The model illustrates that a sustainable and prudent fiscal policy is a necessary condition for successful stabilization of inflation. Thus the lack of prudent fiscal policy, through its effects on inflation, may undermine the EMU accession of large NMS even when their fiscal outcomes fall within the Maastricht range