Fiscal Policy and Macroeconomic Stability within a Monetary Union

University of Exeter Department of Economics

32 Pages Posted: 5 Jun 2005

See all articles by Tatiana Kirsanova

Tatiana Kirsanova

University of Glasgow

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: May 2005

Abstract

We analyse the stability of countries within a monetary union in the face of asymmetric shocks, using a simple but widely applicable model. We show that members of the union may be subject to severe cycles following asymmetric shocks if there is a significant backward looking element in inflation behaviour. This cyclical instability can be mitigated if fiscal policy in each member country reacts to inflation differences, but it can be aggravated if fiscal feedback on debt is too strong. Although these results can only be derived analytically for a model with static consumption, numerical analysis suggest that they remain valid for a more conventional model involving intertemporally optimising consumers.

Keywords: Monetary and Fiscal Policies, Monetary Union, Macroeconomic Stability

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

Suggested Citation

Kirsanova, Tatiana and Vines, David and Wren-Lewis, Simon J.Q., Fiscal Policy and Macroeconomic Stability within a Monetary Union (May 2005). University of Exeter Department of Economics, Available at SSRN: https://ssrn.com/abstract=736266 or http://dx.doi.org/10.2139/ssrn.736266

Tatiana Kirsanova (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
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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