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How important is fiscal policy cooperation in a currency union?

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  • Okano, Eiji

Abstract

By constructing a dynamic stochastic general equilibrium model, which assumes a currency union consisting of two countries with nontradables, we study the importance of fiscal policy cooperation. As shown in the previous studies, we find that the role of fiscal policy is important in maximizing social welfare. However, we have a contrary result for fiscal policy cooperation. While the previous studies highlight that fiscal policy cooperation has a nontrivial effect in maximizing social welfare, we show that fiscal policy cooperation has no benefits, regardless of the share of nontradables. Self-oriented fiscal policy can replicate social welfare under the cooperative setting.

Suggested Citation

  • Okano, Eiji, 2014. "How important is fiscal policy cooperation in a currency union?," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 266-286.
    • Handle: RePEc:eee:dyncon:v:38:y:2014:i:c:p:266-286
    DOI: 10.1016/j.jedc.2013.11.002
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    Cited by:

    1. Okano, Eiji & Hamano, Masashige, 2018. "Inflation Stabilization And Default Risk In A Currency Union," Macroeconomic Dynamics, Cambridge University Press, vol. 22(7), pages 1790-1807, October.
    2. Eiji Okano & Masataka Eguchi, 2020. "The importance of default risk awareness in conducting monetary and fiscal policies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 10(3), pages 361-392, September.
    3. Kaufmann, Christoph, 2019. "Optimal fiscal substitutes for the exchange rate in monetary unions," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 43-62.
    4. Philippopoulos, Apostolis & Varthalitis, Petros & Vassilatos, Vanghelis, 2017. "Fiscal consolidation and its cross-country effects," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 55-106.
    5. Kashiwagi, Masanori, 2017. "A vehicle currency country's welfare under optimal monetary policy," Japan and the World Economy, Elsevier, vol. 42(C), pages 23-31.
    6. Dmitri Blueschke & Reinhard Neck, 2018. "Game of Thrones: Accommodating Monetary Policies in a Monetary Union," Games, MDPI, vol. 9(1), pages 1-15, February.
    7. George Economides & Apostolis Philippopoulos & Petros Varthalitis, 2016. "Monetary Union, Even Higher Integration, or Back to National Currencies?," CESifo Economic Studies, CESifo, vol. 62(2), pages 232-255.
    8. R. Neck & D. Blueschke, 2020. "Every Country for Itself and the Central Bank for Us All?," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 26(4), pages 377-389, November.

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    More about this item

    Keywords

    Currency union; DSGE; Policy cooperation; Optimal monetary policy; Monetary and fiscal policy mix;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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