Fiscal Policy and Inflation in a Monetary Union

18 Pages Posted: 1 Sep 2017

See all articles by José‐Miguel Cardoso‐Costa

José‐Miguel Cardoso‐Costa

IGCP (Portuguese Treasury and Debt Management Agency)

Vivien Lewis

Research Centre; KU Leuven

Date Written: October 2017


We study optimal fiscal policies in a small monetary union country. The government uses nominal non‐state‐contingent debt and distortionary labour taxes to finance exogenous spending. Price levels differ across countries due to consumption home bias; thus fiscal policy influences inflation and the terms of trade. Prices are flexible. We show that, unlike in a country with an independent monetary policy, some variability in labour taxes is optimal. With nominal public debt there is an incentive to use taxes to inflate in bad times when debt levels are high, reminiscent of the optimal monetary policy result of Chari et al. ([Chari, V. V., 1991]).

Suggested Citation

Cardoso‐Costa, José‐Miguel and Lewis, Vivien, Fiscal Policy and Inflation in a Monetary Union (October 2017). Economica, Vol. 84, Issue 336, pp. 779-796, 2017. Available at SSRN: or

José‐Miguel Cardoso‐Costa (Contact Author)

IGCP (Portuguese Treasury and Debt Management Agency) ( email )

Av. República, 57 – 6º
Lisboa, 1050-189

Vivien Lewis

Research Centre ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431

KU Leuven ( email )

Oude Markt 13
Leuven, 3000

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