Fiscal Policy Coordination in Currency Unions at the Effective Lower Bound

47 Pages Posted: 17 Jan 2017

See all articles by Thomas Hettig

Thomas Hettig

University of Tuebingen

Gernot J. Müller

University of Tuebingen - Department of Economics

Date Written: January 2017

Abstract

According to the pre-crises consensus there are separate domains for monetary and fiscal stabilization in a currency union. While the common monetary policy takes care of union-wide fluctuations, fiscal policies should be tailored to meet country-specific conditions. This separation is no longer optimal, however, if monetary policy is constrained by an effective lower bound on interest rates. Specifically, we show that in this case there are benefits from coordinating fiscal policies across countries. By coordinating on a common fiscal stance, policy makers are able to stabilize union-wide activity and inflation while avoiding detrimental movements of a country's terms of trade.

Keywords: coordination, Currency union, effective lower bound, EMU, Fiscal policy, optimal policy, terms-of-trade externality

JEL Classification: E61, E62, F41

Suggested Citation

Hettig, Thomas and Müller, Gernot J., Fiscal Policy Coordination in Currency Unions at the Effective Lower Bound (January 2017). CEPR Discussion Paper No. DP11780, Available at SSRN: https://ssrn.com/abstract=2900197

Thomas Hettig (Contact Author)

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

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