The role of fiscal policy in EMU: a simulation with EUROMON

Country members of EMU as well as the United States have improved their fiscal positions during the course of the past decade. This article considers the impact of further government debt and deficit reductions in the EMU area. First the literature on government finance establishing the role of fiscal policy in macroeconomic management is reviewed. Next some empirical simulations using the macroeconometric multi-country model EUROMON of the Nederlandsche Bank are carried out. With these it is investigated what countries would have to incur if they were to improve their fiscal positions further and more generally, what is the role of fiscal policy in the context of the single currency. This discussion focusses on how countries' fiscal policy can affect first each other and second, general price stability. Finally, a US simulation is presented that shows the possible impact of a further improvement of the US fiscal position as recently projected by the Congressional Budget Office, on the eurozone.