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| Author: | Manasse, P. |
| Title: | Fiscal policy in Europe: the credibility implications of real wage rigidity |
| Journal: | Oxford Economic Papers
1991 : JAN, VOL. 43:2, p. 321-339 |
| Index terms: | FISCAL POLICY EUROPE RATIONAL EXPECTATIONS STABILIZATION |
| Language: | eng |
| Abstract: | The paradoxical observation was analyzed that the European countries did not rely on fiscal policy to stabilize their economies. Rational expectation model in a small open economy with perfect capital mobility was constructed. The optimal response of fiscal policy was analyzed when the economy was hit by an adverse real shock. The analysis finds that, although mostly effective, the fiscal stabilization plan under real wage rigidity (RWR) is not credible. Abandoning stabilization policy altogether can be the only (inefficient but) credible option open to the authorities, provided they have no means to bind their own hands. Lack of intervention can result not from the attempt to establish a reputation, but from the simple lack of it. |
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