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Optimal Monetary and Fiscal Policy in the EMU: Does Fiscal Policy Coordination matter?

Author

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  • Chiara Forlati

    (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)

Abstract

I develop and analyze a DSGE model of a currency union to revise the question of how to conduct monetary and fiscal policy in countries that share the same currency. In contrast with the previous literature which assumes coordination, this paper analyzes the case where coordination lacks among fiscal authorities as well as between fiscal and monetary authorities. I show that the normative prescriptions emphasized by former analyses are not valid any more once policymakers are not coordinated. Indeed, in that case the common central bank does not stabilize the average union in ation as if it were in a closed economy because it has to take into account the distortions caused by the lack of coordination among fiscal policymakers. At the same time, if there is not a common agreement to coordinate fiscal policies, autonomous governments should use government expenditure as a stabilization tool even if shocks are symmetric.

Suggested Citation

  • Chiara Forlati, 2006. "Optimal Monetary and Fiscal Policy in the EMU: Does Fiscal Policy Coordination matter?," Working Papers 200904, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised May 2009.
    • Handle: RePEc:cif:wpaper:200904
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    Citations

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    Cited by:

    1. Equiza-Goñi, Juan & Faraglia, Elisa & Oikonomou, Rigas, 2023. "Union debt management," Journal of International Money and Finance, Elsevier, vol. 130(C).
    2. Celsa Machado & Ana Paula Ribeiro, 2011. "Stabilization Constraints from different-average Public Debt Levels in a Monetary Union with Country-size Asymmetry," EcoMod2011 3152, EcoMod.
    3. Vieira, Paulo & Machado, Celsa & Ribeiro, Ana Paula, 2018. "Optimal discretionary monetary and fiscal policies in a country-size heterogeneous monetary union," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 154-174.
    4. D’Aguanno, Lucio, 2015. "Monetary Policy and Welfare in a Currency Union," The Warwick Economics Research Paper Series (TWERPS) 1082, University of Warwick, Department of Economics.
    5. Lenard Lieb, 2012. "Taking Real Wage Rigidities Seriously: Implications for Optimal Policy Design in a Currency Union," International Economic Journal, Taylor & Francis Journals, vol. 26(1), pages 37-68, September.
    6. D'Aguanno, Lucio, 2015. "Monetary Policy and Welfare in a Currency Union," Economic Research Papers 270012, University of Warwick - Department of Economics.
    7. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series 2534, CESifo.
    8. Treu, Johannes, 2011. "Politökonomische Modellierung eines Abstimmungsprozesses zwischen der Europäischen Zentralbank und den Mitgliedstaaten der Eurozone in Zeiten hoher Staatsverschuldung," Wirtschaftswissenschaftliche Diskussionspapiere 05/2011, University of Greifswald, Faculty of Law and Economics.
    9. Lieb, L.M., 2009. "Taking real rigidities seriously: implications for optimal policy design in a currency union," Research Memorandum 032, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    10. Paulo Vieira & Celsa Machado & Ana Paula Ribeiro, 2016. "Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union," EcoMod2016 9685, EcoMod.
    11. Hettig, Thomas & Müller, Gernot J., 2018. "Fiscal policy coordination in currency unions at the effective lower bound," Journal of International Economics, Elsevier, vol. 115(C), pages 80-98.
    12. Kollmann, Robert, 2010. "Comment on ‘Fiscal Policy, Intercountry Adjustment and the Real Exchange Rate within Europe (C. Allsopp and D. Vines, Oxford University)," MPRA Paper 69891, University Library of Munich, Germany.

    More about this item

    Keywords

    Monetary and Fiscal Policy; Policy Coordination;

    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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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