FISCAL-POLICY AND THE MAASTRICHT SOLVENCY CRITERIA

In this paper we examine the implications of fiscal policy and growing debt stocks for the economy. We construct an extended Mundell-Fleming model, along the lines of Buiter and Miller (''Monetary Policy and In ternational Competitiveness: the Problems of Adjustment'', Oxford Econ omic Papers, Vol. 33 (1981), Supplement, pp. 143-175), that allows us to investigate the effects of fiscal policy and debt accumulation on a n open economy. In order to analyse the implications of fiscal restric tions such as the Maastricht convergence criteria, we undertake some p olicy analyses on our estimated model NiGEM. This model closely resemb les the theoretical construct in its long-run structure, but allows fo r crucial differences in the speed of dynamic responses in a number of markets. We find that, although in the long term the level of activit y is unaffected, the fiscal restrictions win reduce output and raise u nemployment in the short to medium term.