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Passive monetary policy and active fiscal policy in a monetary union

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  • Maćkowiak, Bartosz
  • Schmidt, Sebastian

Abstract

How is the price level determined in a monetary union when the common monetary policy pegs the nominal interest rate? How are the price levels in the member countries determined? We extend the fiscal theory of the price level to the case of a heterogenous monetary union. Price level determinacy follows if fiscal policy at the level of the union as a whole is active. Different combinations of national fiscal policies and a common fiscal policy with “Eurobonds” amount to active fiscal policy for the union, but can have very different implications for the effects of fiscal and monetary policy. We propose how to coordinate the national policies and the common policy for union-wide policy to be active. JEL Classification: E31, E63, F45

Suggested Citation

  • Maćkowiak, Bartosz & Schmidt, Sebastian, 2023. "Passive monetary policy and active fiscal policy in a monetary union," Working Paper Series 2781, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232781
    Note: 1026376
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Eurobonds; monetary union; fiscal rules; fiscal theory of the price level;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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