Inflation Persistence, Fiscal Constraints and Non-Cooperative Authorities: The Stabilisation Policy in a Monetary Union

University of Exeter Department of Economics Working Paper

37 Pages Posted: 7 Jun 2005

See all articles by Tatiana Kirsanova

Tatiana Kirsanova

University of Glasgow

Mathan Satchi

University of Kent - Department of Economics

David Vines

University of Oxford - Balliol College - Department of Economics; Australian National University (ANU); Centre for Economic Policy Research (CEPR)

Simon Wren-Lewis

University of Oxford - Economics Department

Date Written: March 5, 2005

Abstract

This paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.

Keywords: Optimal monetary and fiscal policies, Monetary union, Asymmetric Shocks

JEL Classification: E31, E52, E58, E61, C61

Suggested Citation

Kirsanova, Tatiana and Satchi, Mathan and Vines, David and Wren-Lewis, Simon J.Q., Inflation Persistence, Fiscal Constraints and Non-Cooperative Authorities: The Stabilisation Policy in a Monetary Union (March 5, 2005). University of Exeter Department of Economics Working Paper, Available at SSRN: https://ssrn.com/abstract=736124 or http://dx.doi.org/10.2139/ssrn.736124

Tatiana Kirsanova (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Mathan Satchi

University of Kent - Department of Economics ( email )

Keynes College
Kent, CT2 7NP
United Kingdom

David Vines

University of Oxford - Balliol College - Department of Economics ( email )

Manor Road
Oxford, OX1 3BJ, Oxfordshire OX13UQ
United Kingdom
+44 1865 271 067 (Phone)
+44 1865 271 094 (Fax)

Australian National University (ANU)

Canberra, Australian Capital Territory
Australia

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Simon J.Q. Wren-Lewis

University of Oxford - Economics Department ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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