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The interplay of monetary and fiscal policies in a multinational currency union

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  • Marcelo Sanchez

Abstract

In our multi-country currency union model, national fiscal authorities free ride on the single monetary authority, which leads to higher interest rate variability. We carry out welfare comparisons between monetary autonomy and currency union, assessing the sensitivity of results around calibrated parameter values. Under country-specific demand and supply disturbances, monetary union stabilisation is hampered by steeper supply slopes, a greater preference for price stability, governments' stronger fiscal objective focus and a higher sensitiveness of aggregate demand to real exchange rates. Sensitivity results are ambiguous for country size. Supply-driven small open economies may benefit from maintaining monetary sovereignty.

Suggested Citation

  • Marcelo Sanchez, 2010. "The interplay of monetary and fiscal policies in a multinational currency union," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 3(1), pages 33-49.
    • Handle: RePEc:ids:ijmefi:v:3:y:2010:i:1:p:33-49
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    Cited by:

    1. Muhammad Ali Nasir & Junjie Wu & Milton Yago & Alaa M. Soliman, 2016. "Macroeconomic policy interaction: State dependency and implications for financial stability in UK: A systemic review," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1154283-115, December.

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