Public Debt, Policy Mix and European Stability

Open Access

Abstract

This paper highlights the specics of a monetary union, such as the Euro area, regarding the possible choices of monetary and scal policies. As the dynamics of public debt are specic to the choices made by each government, I show that the dynamic stability of the area requires coordination of scal policies, particularly in the case of a liquidity trap situation. My results suggest that a scal union, taking the form of a common debt, guarantees the dynamic stability of the area, notwithstanding the monetary policy, chosen or constrainedthus improving institutional robustness of the European Union.