Interactions between monetary and fiscal policy rules

The Fiscal Stability Pact for EMU implies that constraints on fiscal policy facilitate inflation control. In this paper we identify two stable policy regimes. When monetary policy seeks to raise real interest rates in respons e to excess inflation, a self-stabilising fiscal policy is required to ensu re model stability. A fiscal policy which does not, by itself, ensure fisca l solvency constrains monetary policy to be relatively 'passive'. However, in simulations we conclude that the central bank does not need to seek, on this account, the degree of debt stabilisation that appears to be implied b y the fiscal stability pact.