Symbiosis of Monetary and Fiscal Policies in a Monetary Union
Princeton University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Ecole Polytechnique Fédérale de Lausanne
August 13, 1999
Journal of International Economics, Vol. 60, No. 2, 2003
We consider the interaction between the monetary policy of a common central bank in a monetary union, and the separate fiscal policies of the member countries. We construct a model of the Barro-Gordon type extended to many countries and countercyclical fiscal stabilization policies. Each country's fiscal policies inflict positive (output expansion) and negative (inflation) externalities on other countries, and the common monetary policy has its time-consistency problem. But we find that each kind of policy helps solve the other kind's problem. The first-best can be achieved despite the inevitability of some ex post monetary accommodation to fiscal profligacy, without the need for fiscal coordination, without the need for monetary commitment, without the need for a conservative central bank, and irrespective of whether the fiscal or the monetary authorities have the first move.
Number of Pages in PDF File: 15
JEL Classification: F33, F42Accepted Paper Series
Date posted: February 18, 2000
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo3 in 0.531 seconds