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On the Logic of Fiscal Policy Coordination in a Monetary Union

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  • Oliver Landmann

    (Universität Freiburg)

Abstract

Fiscal policies have been widely criticized for their failure to act as a stabilizing countercyclical force in the European Monetary Union (EMU) prior to the Financial Crisis of 2008, and even more so thereafter. Motivated by EMU experience, this paper lays out a parsimonious model of fiscal-monetary policy interaction between national fiscal authorities and a common central bank. It is well known that the structure of this interaction changes fundamentally when the central bank is constrained by a binding zero lower bound on the interest rate. This paper demonstrates that decentralized fiscal policies suffer from a systematic procyclical bias in a monetary union, both when the zero lower bound bites and when it does not. Whereas the existing literature on fiscal policy coordination knows “locomotive games” and “discipline games”, in which fiscal policies are too tight or too loose, respectively, the analysis in this paper identifies a more general “stabilization game” in which coordination can play a useful role by strengthening the countercyclical thrust of fiscal policies.

Suggested Citation

  • Oliver Landmann, 2018. "On the Logic of Fiscal Policy Coordination in a Monetary Union," Open Economies Review, Springer, vol. 29(1), pages 69-87, February.
    • Handle: RePEc:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9446-z
    DOI: 10.1007/s11079-017-9446-z
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    Cited by:

    1. Hubert Kempf, 2021. "Fiscal Federalism in a Monetary Union: The No-Cooperation Pitfall," Open Economies Review, Springer, vol. 32(1), pages 109-151, February.
    2. Carsten Hefeker & Michael Neugart, 2019. "Policy Coordination Under Model Disagreement and Uncertainty," Open Economies Review, Springer, vol. 30(4), pages 719-737, September.
    3. Chortareas, Georgios & Mavrodimitrakis, Christos, 2021. "Policy conflict, coordination, and leadership in a monetary union under imperfect instrument substitutability," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 342-361.
    4. Loewald, Christopher & Wörgötter, Andreas, 2019. "Do monetary unions dream of structural reforms?," ECON WPS - Working Papers in Economic Theory and Policy 01/2019, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.

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