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Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union

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  • Barry Eichengreen

    ()

  • Fabio Ghironi

    ()

Abstract

We develop a model of monetary and fiscal policies appropriate for considering U.S.-European policy interactions in an era of near-balanced budgets and European monetary union. We study the determinants of policy trade-offs and incentives for central banks and governments across the Atlantic. Smaller, more open economies face more favorable trade-offs, since openness enhances policy effectiveness via the exchange-rate channel. Changes in Europe's monetary arrangements do not affect U.S. trade-offs, although they alter the trade-offs facing European policy-makers. Fiscal trade-offs depend crucially on the extent to which fiscal policy is distortionary. Changes in taxes and spending move both employment and inflation in the desired direction following a worldwide supply shock when spending is financed with distortionary taxes. Copyright Kluwer Academic Publishers 2002

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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 13 (2002)
Issue (Month): 4 (October)
Pages: 381-411

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Handle: RePEc:kap:openec:v:13:y:2002:i:4:p:381-411

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: employment-inflation trade-off; exchange-rate regimes; fiscal distortions; fiscal policy; international cooperation; monetary policy;

References

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  1. Alberto Alesina & Silvia Ardagna, 1998. "Tales of fiscal adjustment," Economic Policy, CEPR & CES & MSH, vol. 13(27), pages 487-545, October.
  2. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  3. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
  4. Gilles Saint Paul, 1998. "The political consequences of unemployment," Economics Working Papers 343, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Giancarlo Corsetti & Paolo Pesenti, 2001. "International Dimensions of Optimal Monetary Policy," NBER Working Papers 8230, National Bureau of Economic Research, Inc.
  6. D. Begg & F. Giavazzi & Ch. Wyplosz, 1999. "Options for the Future Exchange RatePolicy of the EMU," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 1.
  7. Ardagna, Silvia & Alesina, Alberto, 1998. "Tales of Fiscal Adjustment," Scholarly Articles 2579822, Harvard University Department of Economics.
  8. Eichengreen, Barry & Ghironi, Fabio, 1997. "How Will Transatlantic Policy Interactions Change with the Advent of EMU?," CEPR Discussion Papers 1643, C.E.P.R. Discussion Papers.
  9. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
  10. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, December.
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Citations

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Cited by:
  1. René Cabral-Torres, . "Assessing the Impact of Real Shocks on Small Dollarized Economies," Discussion Papers 05/27, Department of Economics, University of York.
  2. René Cabral-Torres, . "Monetary and Fiscal Policy Coordination," Discussion Papers 05/28, Department of Economics, University of York.
  3. Dmitriev, Mikhail & Hoddenbagh, Jonathan, 2012. "The optimal design of a fiscal union," MPRA Paper 46007, University Library of Munich, Germany, revised Apr 2013.
  4. Herzog, Bodo, 2006. "Coordination of fiscal and monetary policy in CIS-countries: A theory of optimum fiscal area?," Research in International Business and Finance, Elsevier, vol. 20(2), pages 256-274, June.
  5. Bas van Aarle & Harry Garretsen & Florence Huart, 2003. "Transatlantic Monetary and Fiscal Policy Interaction," CESifo Working Paper Series 1042, CESifo Group Munich.
  6. Pogorelec, Sabina, 2006. "Fiscal and monetary policy in the enlarged European Union," Working Paper Series 0655, European Central Bank.
  7. Cabral, René, 2010. "Why dollarization didn't succeed: Comparing credibility and the impact of real shocks on small open economies," The North American Journal of Economics and Finance, Elsevier, vol. 21(3), pages 297-313, December.

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