Fiscal Policy and Macroeconomic Stability within a Currency Union

29 Pages Posted: 28 Jun 2006

See all articles by David Vines

David Vines

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

Tatiana Kirsanova

University of Glasgow

Simon Wren-Lewis

University of Oxford - Economics Department

Date Written: March 2006

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, and possibly unstable, cycles following asymmetric shocks if there is a significant backward looking element in inflation behaviour, and if real interest rates influence the level of aggregate demand. 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.

Keywords: Monetary and fiscal policies, monetary union, macroeconomic stability

Suggested Citation

Vines, David and Kirsanova, Tatiana and Wren-Lewis, Simon J.Q., Fiscal Policy and Macroeconomic Stability within a Currency Union (March 2006). CEPR Discussion Paper No. 5584, Available at SSRN: https://ssrn.com/abstract=912704

David Vines (Contact Author)

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

Tatiana Kirsanova

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
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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