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Asymmetric shocks in a currency union with monetary and fiscal handcuffs?

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Abstract

This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent that they are common across member states can be reversed. Countries can be worse off when their neighbors experience similar shocks, including policy-driven reductions in government spending.

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  • Christopher J. Erceg & Jesper Lindé, 2010. "Asymmetric shocks in a currency union with monetary and fiscal handcuffs?," International Finance Discussion Papers 1012, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:1012
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    Cited by:

    1. Lemoine, Matthieu & Lindé, Jesper, 2016. "Fiscal consolidation under imperfect credibility," European Economic Review, Elsevier, vol. 88(C), pages 108-141.
    2. Giancarlo Corsetti & Keith Kuester & André Meier & Gernot J. Müller, 2013. "Sovereign Risk, Fiscal Policy, and Macroeconomic Stability," Economic Journal, Royal Economic Society, vol. 0, pages 99-132, February.
    3. Robert Kollmann, 2021. "Liquidity traps in a monetary union," Oxford Economic Papers, Oxford University Press, vol. 73(4), pages 1581-1603.
    4. Javier Andrés & José E. Boscá & Javier Ferri, 2016. "Instruments, rules, and household debt: the effects of fiscal policy," Oxford Economic Papers, Oxford University Press, vol. 68(2), pages 419-443.
    5. Kollmann, Robert, 2021. "Liquidity traps in a world economy," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    6. Erceg, Christopher J. & Lindé, Jesper, 2013. "Fiscal consolidation in a currency union: Spending cuts vs. tax hikes," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 422-445.
    7. Gelfer, Sacha, 2024. "Examining business cycles and optimal monetary policy in a regional DSGE model," Economic Modelling, Elsevier, vol. 136(C).
    8. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions," IMF Working Papers 2016/138, International Monetary Fund.
    9. David Cook & Michael B Devereux, 2019. "Fiscal Policy in a Currency Union at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(S1), pages 43-82, December.
    10. Clancy, Daragh & Jacquinot, Pascal & Lozej, Matija, 2014. "The Effects of Government Spending in a Small Open Economy within a Monetary Union," Research Technical Papers 12/RT/14, Central Bank of Ireland.
    11. Fujiwara, Ippei & Ueda, Kozo, 2013. "The fiscal multiplier and spillover in a global liquidity trap," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1264-1283.
    12. Alex Haberis & Anna Lipińska, 2020. "A Welfare‐Based Analysis of International Monetary Policy Spillovers at the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(5), pages 1107-1145, August.
    13. Soldatos, Gerasimos T., 2014. "A Fiscal-Monetary Policy Scheme against Greek Indebtedness and Impoverishment - Un programma di politica fiscale-monetaria contro l’indebitamento e l’impoverimento della Grecia," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 67(2), pages 243-261.
    14. Giancarlo Corsetti & Keith Kuester & Andre Meier & Gernot J. Müller, 2011. "Soverign risk and the effects of fiscal retrenchment in deep recessions," Working Papers 11-43, Federal Reserve Bank of Philadelphia.
    15. Zuzana Mucka & Michal Horvath, 2015. "Fiscal Policy Matters A New DSGE Model for Slovakia," Discussion Papers Discussion Paper No. 1/20, Council for Budget Responsibility.
    16. Davoine, Thomas & Molnar, Matthias, 2020. "Cross-country fiscal policy spillovers and capital-skill complementarity in integrated capital markets," Economic Modelling, Elsevier, vol. 88(C), pages 132-150.
    17. Prachi Mishra & Raghuram G. Rajan, 2016. "Rules of the Monetary Game," Working Papers id:10533, eSocialSciences.
    18. Zuzana Mucka, 2016. "Fiscal Policy Matters A New DSGE Model for Slovakia," Discussion Papers Discussion Paper No. 1/20, Council for Budget Responsibility.
    19. Soldatos, Gerasimos T., 2014. "A Fiscal-Monetary Policy Scheme Against Greek Indebtedness and Impoverishment," MPRA Paper 57080, University Library of Munich, Germany.
    20. Charalampidis, Nikolaos, 2020. "On unemployment cycles in the Euro Area, 1999–2018," European Economic Review, Elsevier, vol. 121(C).

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    Monetary policy; monetary unions; Fiscal policy;
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