fiscal policy), governments might have the incentive to pursue lax policies in the national interest, putting pressure on the central bank to increase inflation (Chari and Kehoe, 2008).
This literature has long called for a strengthening of fiscal rules, but also for euro-area wide bank supervisory bodies in order to bypass dangerous incentives at the national level to tolerate imbalances in the domestic banking sector, with associated risks of contagion and systemic crises (Uhlig, 2002). Indeed, the current dire situation is the result of the lack of effective and enforceable rules, i.e.