GOVERNMENT FINANCE IN A COMMON CURRENCY AREA

European integration in 1992 may require greater exchange rate coordinition than currently exists. The Delors report goes as far as to recommend the eventual adoption of a single currency. However, the formation of a common currency area raises fears that independent fiscal policies may produce inferior outcomes. This paper shows that lack of cooperation in fiscal policy leads to too little inflation, too high taxes, and too much government spending. (JEL F33)