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The Macroeconomic Policy Mix in a Monetary Union with Flexible Inflation Targeting

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  • Andersen, Torben M.

    (Department of Economics, University of Aarhus, Denmark)

Abstract

Policy mix problems may arise in a monetary union with centralized monetary policy and decentralized fiscal policy. A consequence of this may be an inappropriate stabilization of shocks. This paper addresses how policy coordination problems are affected by the objectives of the monetary authority. It is shown that non-coordinated fiscal policies tend to be too counter-cyclical in the case of aggregate shocks, and that this bias can be reduced by lowering the weight to output stability in monetary policy. Oppositely, for country-specific shocks non- oordinated fiscal policies tend to be too pro-cyclical and this bias can be reduced by increasing the weight to output stability in monetary policy. Considering the assignment of policy tasks -- within the set of binding policy rules for fiscal- and monetary policy -- it is found that flexible inflation targeting dominates strict inflation targeting.

Suggested Citation

  • Andersen, Torben M., "undated". "The Macroeconomic Policy Mix in a Monetary Union with Flexible Inflation Targeting," Economics Working Papers 2003-2, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2003-2
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    Cited by:

    1. Holler, Manfred & Skott, Peter, "undated". "The importance of setting the agenda," Economics Working Papers 2003-8, Department of Economics and Business Economics, Aarhus University.
    2. Jensen, Kraen Blume & Ejrnaes, Mette & Nielsen, Helena Skyt & Würtz, Allan, "undated". "Self-Employment among Immigrants: A Last Resort?," Economics Working Papers 2003-13, Department of Economics and Business Economics, Aarhus University.
    3. Goergens, Tue & Paldam, Martin & Würtz, Allan, "undated". "How does Public Regulation affect Growth?," Economics Working Papers 2003-14, Department of Economics and Business Economics, Aarhus University.

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    More about this item

    Keywords

    EMU; policy-mix; shocks and policy cooperation.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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