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Optimal Fiscal Policy Rules in a Monetary Union

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  • TATIANA KIRSANOVA
  • MATHAN SATCHI
  • DAVID VINES
  • SIMON WREN-LEWIS

Abstract

This paper investigates the importance of fiscal policy in providing macroeconomic stabilization in a monetary union. We use a microfounded New Keynesian model of a monetary union, which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation, output, and the terms of trade, but that not much is lost if national fiscal policy is restricted to react, on the one hand, to "national differences" in inflation and, on the other hand, to either national differences in output or changes in the terms of trade. However, welfare is reduced if national fiscal policy responds only to output, ignoring inflation. Copyright 2007 The Ohio State University.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 7 (October)
Pages: 1759-1784

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:7:p:1759-1784

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
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  4. Why anti-stimulus arguments do not apply
    by Lars P Syll in Lars P Syll's Blog on 2012-01-30 09:36:54
  5. Some Thoughts on Fiscal Rules
    by Mainly Macro in Mainly Macro on 2012-12-09 23:41:00
  6. The UK is well ahead of the US and the EU in its use of fiscal rules
    by Managing Editor in British Politics and Policy at LSE on 2012-12-11 08:00:52
  7. The UK is well ahead of the US and the EU in its use of fiscal rules.
    by Blog Admin in EUROPP European Politics and Policy on 2012-12-15 11:00:38
  8. The Eurozone’s Founding Mistake
    by Mainly Macro in Mainly Macro on 2013-07-18 09:25:00
  9. How to be a New Keynesian and an Old Keynesian at the same time
    by Mainly Macro in Mainly Macro on 2013-11-13 23:22:00
  10. [経済]ニューケインジアンとオールドケインジアンに同時になる方法
    by himaginary in himaginaryの日記 on 2013-11-17 00:00:00
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