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Monetary and Fiscal Policy Interactions in a Monetary Union with Country-size Asymmetry

Author

Listed:
  • Celsa Machado

    (ISCAP - Instituto Superior de Contabilidade e Administração do Porto)

  • Ana Paula Ribeiro

    (Faculdade de Economia da Universidade do Porto and CEF.UP)

Abstract

This paper analyses optimal discretionary non-coordinated monetary and fiscal stabilization policies in a micro-founded New-Keynesian model of a two-country monetary union with country-size asymmetry, under two policy scenarios. A balanced-budget policy scenario and a policy scenario where the presence of government debt limits the macroeconomic stabilization effort and enlarges the sources of strategic policy interactions. Numerical results indicate that non-cooperation exacerbates the fiscal policy activism of a small country while moderating that of a large country. In the balanced-budget scenario, non-cooperation improves (reduces) welfare for a small (large) country while, in the high-debt scenario, it produces the opposite results. Cooperation dominates non-cooperation for the union as a whole.

Suggested Citation

  • Celsa Machado & Ana Paula Ribeiro, 2010. "Monetary and Fiscal Policy Interactions in a Monetary Union with Country-size Asymmetry," CEF.UP Working Papers 1003, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:cetedp:1003
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    Citations

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    Cited by:

    1. 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.
    2. 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.
    3. Muhammad Ali Nasir & Junjie Wu & Milton Yago & Alaa M. Soliman, 2016. "Macroeconomic policy interaction: State dependency and implications for financial stability in UK: A systemic review," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1154283-115, December.
    4. Patrik Kupkovič, 2017. "Dynamika inflácie v krajinách monetárnej únie: jej vplyv na spoločnú hospodársku politiku [Inflation Dynamics in Countries of the Monetary Union: What is its Impact on the Common Economic Policy?]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(1), pages 62-81.

    More about this item

    Keywords

    Monetary union; optimal fiscal and monetary policies; asymmetric countries.;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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