Policy Spillovers and Synergies in a Monetary Union
65 Pages Posted: 28 Aug 2016
Date Written: August 26, 2016
We provide a general equilibrium framework for analyzing the effects of supply and demand side policies, and the potential synergies between them, in an asymmetric monetary union that faces a liquidity trap and a slow deleveraging process in its 'periphery'. We find that the joint implementation of pro-competition structural reforms in the periphery, a fiscal expansion in the core, and forward guidance about the future path of nominal interest rates produces positive synergies between the three policies: forward guidance reinforces the expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance. Our results provide a case for complementing current unconventional monetary stimuli in the euro area with national efforts on the structural reform and fiscal fronts.
Keywords: monetary union, deleveraging, zero lower bound, structural reforms, synergies
JEL Classification: E44, E63, D42
Suggested Citation: Suggested Citation