Fiscal Consequences of Missing an Inflation Target

The European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary–fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect of the reliability of the European Central Bank monetary policy on public debt burdens. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries.