The Fiscal Framework in a Currency Union: Lessons from a Comparison between the Euro Area and the Eastern Caribbean Currency Union

21 Pages Posted: 9 Jun 2016

See all articles by Andrew J. Hughes Hallett

Andrew J. Hughes Hallett

George Mason University - School of Policy, Government, and International Affairs

Svend E. Hougaard Jensen

Copenhagen Business School - Department of Economics

Date Written: June 2016

Abstract

This paper draws out lessons from the euro area (EA) that are transferable to the Eastern Caribbean Currency Union (ECCU) and other Caribbean economies with fixed exchange rates. Based on observations from both the EA and the ECCU, we present a new policy framework which is capable of imposing fiscal discipline, with the aim of avoiding the risk of unsustainable fiscal policies reappearing and of preventing monetary policy from being undermined by undisciplined national governments. In the ECCU case, we find that fiscal deficits are more a result of financial and trade imbalances than fiscal indiscipline per se. Consequently, constraints on overall debt, public and private, rather than direct limits on endogenous public deficits, appear to be the appropriate response.

Suggested Citation

Hughes Hallett, Andrew and Hougaard Jensen, Svend Erik, The Fiscal Framework in a Currency Union: Lessons from a Comparison between the Euro Area and the Eastern Caribbean Currency Union (June 2016). The World Economy, Vol. 39, Issue 6, pp. 803-823, 2016, Available at SSRN: https://ssrn.com/abstract=2792434 or http://dx.doi.org/10.1111/twec.12359

Andrew Hughes Hallett (Contact Author)

George Mason University - School of Policy, Government, and International Affairs ( email )

Founders Hall
3351 Fairfax Dr.
Arlington, VA 22201
United States

Svend Erik Hougaard Jensen

Copenhagen Business School - Department of Economics ( email )

Porcelænshaven 16 A, 1
Frederiksberg C, DK-2000
Denmark
(+45) 3815 3478 (Phone)

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