Cooperative Monetary and Fiscal Policies in the Euro-Area
18 Pages Posted: 5 Sep 2017
Date Written: May 6, 2017
This paper discusses the interaction of fiscal and monetary policy in the euro area. Given the existence of a monetary union, but absence of a federal fiscal union, many observers suggest a fiscal union as the next step of euro area constitutional reform. Though further fiscal capacity has a chance to be built in the near future, a more coherent fiscal union of federal type does not appear politically feasible in the short run. Given the claims of maintaining sovereign fiscal authorities by the member countries of the euro area, we suggest to move forward with cooperative monetary and fiscal institutions and policies that allow for decentralized fiscal decisions, while taking federal stabilization policies into account. This approach will increase the probability of survival of the euro area compared with the current fiscal arrangements and non-cooperative solutions. Using a dynamic macro model, actual solution paths are contrasted with counterfactual paths which our cooperative model would suggest.
Keywords: Monetary and Fiscal Policy, EU- Area, Cooperative Game
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