Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve

Wuerzburg Economic Working Paper No. 40

41 Pages Posted: 7 Mar 2004

See all articles by Peter Bofinger

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: October 2003

Abstract

In this paper we carry over a static version of a New Keynesian Macro Model developed in previous papers (see Bofinger, Mayer, and Wollmershauser 2002) to a monetary union. For a similar approach see (Uhlig 2002). We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are in a vulnerable position exposed to asymmetric shocks and therefore in need for fiscal policy as an independent stabilization agent with room to breath.

Keywords: monetary policy, inflation targeting, fiscal policy, policy coordination, free-riding

JEL Classification: E50, E60, H70

Suggested Citation

Bofinger, Peter and Mayer, Eric, Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve (October 2003). Wuerzburg Economic Working Paper No. 40, Available at SSRN: https://ssrn.com/abstract=514343 or http://dx.doi.org/10.2139/ssrn.514343

Peter Bofinger (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 944/5 (Phone)
+49 931 312 775 (Fax)

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

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