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

41 Pages Posted: 29 Mar 2005

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

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Date Written: December 2004

Abstract

In this Paper, we carry over a static version of a New Keynesian Macromodel a la Clarida Gali Gertler (1999) to a monetary union. 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 vulnerable and, therefore, in need of fiscal policy as an independent stabilization agent with room to breath.

Keywords: Monetary policy, inflation targeting, fiscal policy, policy coordination

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 (December 2004). Available at SSRN: https://ssrn.com/abstract=694384

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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