Policy Spillovers and Synergies in a Monetary Union

65 Pages Posted: 28 Aug 2016

See all articles by Oscar Arce

Oscar Arce

Banco de España

Samuel Hurtado

Banco de España

Carlos Thomas

Banco de España

Date Written: August 26, 2016

Abstract

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

Arce, Oscar and Hurtado, Samuel and Thomas, Carlos, Policy Spillovers and Synergies in a Monetary Union (August 26, 2016). ECB Working Paper No. 1942. Available at SSRN: https://ssrn.com/abstract=2830575

Oscar Arce (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Samuel Hurtado

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

Carlos Thomas

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

HOME PAGE: http://www.bde.es

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