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Monetary Rules and the Spillover of Regional Fiscal Policies in a Federation

26 Pages Posted: 16 Sep 2010  

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS)

Dan Peled

University of Haifa - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 1, 2009

Abstract

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.

Keywords: Monetary Union, Inflation tax, Seigniorage, monetary rules, public debt

JEL Classification: E31, E42, E58, E62

Suggested Citation

Cooper, Russell and Kempf, Hubert and Peled, Dan, Monetary Rules and the Spillover of Regional Fiscal Policies in a Federation (February 1, 2009). Banque de France Working Paper No. 233. Available at SSRN: https://ssrn.com/abstract=1676796 or http://dx.doi.org/10.2139/ssrn.1676796

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hubert Kempf

Ecole Normale Superieure de Cachan (ENS) ( email )

61 avenue du président Wilson
Cachan, Paris 94235
France

Dan Peled

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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