Optimal Fiscal Policy Rules in a Monetary Union

26 Pages Posted: 9 Nov 2006

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

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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 non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation, output and the terms of trade, but that not much is lost if national fiscal policy is restricted to react, on the one hand, to national differences in inflation and, on the other hand, to either national differences in output or changes in the terms of trade. However, welfare is reduced if national fiscal policy responds only to output, ignoring inflation.

Keywords: Optimal monetary and fiscal policies, Monetary union, Simple rules

JEL Classification: E52, E61, E63, F41

Suggested Citation

Kirsanova, Tatiana and Satchi, Mathan and Vines, David and Wren-Lewis, Simon J.Q., Optimal Fiscal Policy Rules in a Monetary Union. Journal of Money, Credit, and Banking, Forthcoming, Available at SSRN: https://ssrn.com/abstract=943033

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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