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Fiscal and monetary policy coordination in EMU

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Author Info

  • Jürgen von Hagen

    (ZEI, University of Bonn, Germany, Indiana University, USA and CEPR)

  • Susanne Mundschenk

    (ZEI, University of Bonn, Germany)

Abstract

The purpose of this paper is to analyze and discuss the coordination of fiscal and monetary policies in EMU. In section 2, we develop a framework for studying monetary and fiscal policy in a monetary union to explore the implications of the common currency for policy coordination. We show that there is little need for coordinating monetary and fiscal policies in the long run. In section 3, we study the interaction of monetary and fiscal policies in the short run. A monetary policy firmly committed to price stability at the EMU level implies that the central bank controls aggregate output at the euro-area level, while national fiscal policies determine the distribution of aggregate demand across the participating countries. Thus, national governments are engaged in a purely distributional game with inefficient outcomes unless policies are coordinated. If monetary policy also pursues a goal of output stabilization, policy coordination should include the central bank together with the fiscal authorities. We also show that the proposal to restrict fiscal policies to the operation automatic stabilizers at the national level, which is now often made in EMU, does not solve the issue of policy coordination. Instead, it worsens the situation of the central bank unless automatic stabilizers are identical in all member economies. In section 4, we review the existing mechanisms for policy coordination and show that they are deficient, since they focus on the long run rather than the short run and largely ignore the interdependence of national economic policies and the ECB’s monetary policy. Section 5 concludes.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 8 (2003)
Issue (Month): 4 ()
Pages: 279-295

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Handle: RePEc:ijf:ijfiec:v:8:y:2003:i:4:p:279-295

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References

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  1. Uhlig, H.F.H.V.S., 2002. "One Money, But Many Fiscal Policies in Europe: What are the Consequences?," Discussion Paper 2002-32, Tilburg University, Center for Economic Research.
  2. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
  3. Patrick, John D., 1973. "Establishing convergent decentralized policy assignment," Journal of International Economics, Elsevier, vol. 3(1), pages 37-51, February.
  4. Beetsma, Roel M W J & Bovenberg, A Lans, 2000. " Designing Fiscal and Monetary Institutions for a European Monetary Union," Public Choice, Springer, vol. 102(3-4), pages 247-69, March.
  5. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
  6. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
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Citations

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Cited by:
  1. Bofinger, Peter & Mayer, Eric, 2004. "Monetary and Fiscal policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve," CEPR Discussion Papers 4790, C.E.P.R. Discussion Papers.
  2. repec:rdg:emxxdp:em-dp2008-72 is not listed on IDEAS
  3. Carlo Panico & Francesco Purificato, 2012. "The Role of Institutional and Political Factors in the European Debt Crisis," Working Papers wp280, Political Economy Research Institute, University of Massachusetts at Amherst.
  4. Pappa, Evi & Vassilatos, Vanghelis, 2007. "The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability," European Economic Review, Elsevier, vol. 51(6), pages 1492-1513, August.
  5. Eijffinger, S.C.W. & Governatori, M., 2004. "Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU," Open Access publications from Tilburg University urn:nbn:nl:ui:12-143035, Tilburg University.
  6. Cornel Oros, 2008. "Macroeconomic stabilization in a heterogeneous monetary union: some insights into the effects of fiscal policy coordination," Economics Bulletin, AccessEcon, vol. 5(34), pages 1-12.
  7. repec:ebl:ecbull:v:5:y:2008:i:34:p:1-12 is not listed on IDEAS
  8. Tariq Mahmood & Maqbool Hussain Sial, 2011. "The Relative Effectiveness of Monetary and Fiscal Policies in Economic Growth: A Case Study of Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 1(4), pages 236-244, December.
  9. Carlos Vieira & Isabel Vieira & Sofia Costa, 2003. "Monetary and Fiscal Policies in EMU: some relevant issues," Eastward Enlargement of the Euro-zone Working Papers wp17f, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Mar 2003.
  10. Sell, Friedrich L., 2003. "Die Stabilitätsprogramme der EU: Anspruch und Wirklichkeit in den ersten vier Jahren der Europäischen Währungsunion," Working Papers in Economics 2003,2, Universität der Bundeswehr München, Economic Research Group.
  11. Virginie Traclet, 2004. "Monetary and Fiscal Policies in Canada: Some Interesting Principles for EMU?," Working Papers 04-28, Bank of Canada.
  12. Cornel Oros, 2009. "Economic Governance in an Asymmetric Monetary Union: A Fiscal Policy Game Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 39-60.

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