Monetary Rules and the Spillover of Regional Fiscal Policies in a Federation
University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)
Paris School of Economics and Université Paris-1 Panthéon-Sorbonne; Direction de la Recherche, Banque de France
University of Haifa - Department of Economics; National Bureau of Economic Research (NBER)
February 1, 2009
Banque de France Working Paper No. 233
This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modelled here as reserve requirements. When capital markets are integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.
Number of Pages in PDF File: 26
Keywords: Monetary Union, Inflation tax, Seigniorage, monetary rules, public debt
JEL Classification: E31, E42, E58, E62
Date posted: September 16, 2010
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