The paper aims to shed light on the relation between monetary and fiscal policy in EMU, focusing on the interest rates and deficit dynamics. We present a theoretical model in which monetary and fiscal policy independently interact in a closed economic system through their own instrument, namely,...

This paper reviews the fiscal activities that governments in a sample of 26 developing countries have obliged their central banks to undertake. In the main, these activities fall under five categories: (1) collecting seigniorage; (2) imposing financial restriction; (3) implementing selective...

Independent central banks prefer balanced budgets due to the long-run connection between deficits and inflation and can enforce their preference through interest rate increases and denial of credit to the government. We argue that legal central bank independence (CBI) deters fiscal deficits...