Optimal Fiscal Policy of a Monetary Union Member

24 Pages Posted: 18 Jun 2014

See all articles by Seppo Orjasniemi

Seppo Orjasniemi

Bank of Finland, Monetary Policy and Research Department

Date Written: June 10, 2014

Abstract

In this essay we study the optimal non-coordinated fiscal policy in a monetary union, where a common and independent monetary authority commits to optimally set the union-wide nominal interest rate. The national governments in the monetary union implement independent fiscal policies by choosing the level of government expenditures. We show that under a non-coordinated optimal fiscal policy rule government spending should react counter cyclically to the local output gap and inflation, while the union-wide aggregate fluctuations are stabilized by the common monetary policy. We also show that the spillovers caused by asymmetric shocks depend on the relative size of the country subject to these shocks.

Keywords: monetary union, monetary policy, fiscal policy

JEL Classification: E52, E62, F41

Suggested Citation

Orjasniemi, Seppo, Optimal Fiscal Policy of a Monetary Union Member (June 10, 2014). Bank of Finland Research Discussion Paper No. 13/2014, Available at SSRN: https://ssrn.com/abstract=2454002 or http://dx.doi.org/10.2139/ssrn.2454002

Seppo Orjasniemi (Contact Author)

Bank of Finland, Monetary Policy and Research Department ( email )

PO Box 160
00101 Helsinki
Finland

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