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Asymmetric Shocks in a Currency Union with Monetary and Fiscal Handcuffs

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  • Christopher J. Erceg
  • Jesper Lind�

Abstract

This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent that they are common across member states can be reversed. Countries can be worse off when their neighbors experience similar shocks, including policy-driven reductions in government spending.

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File URL: http://www.jstor.org/stable/full/10.1086/658304
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Bibliographic Info

Article provided by University of Chicago Press in its journal NBER International Seminar on Macroeconomics.

Volume (Year): 7 (2011)
Issue (Month): 1 ()
Pages: 95 - 136

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Handle: RePEc:ucp:intsma:doi:10.1086/658304

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Cited by:
  1. Javier Andrés & J.E. Boscá & Javier Ferri, 2014. "Instruments, rules and household debt: the effects of fiscal policy," Working Papers 1401, International Economics Institute, University of Valencia.
  2. Ippei Fujiwara & Kozo Ueda, 2010. "The fiscal multiplier and spillover in a global liquidity trap," Globalization and Monetary Policy Institute Working Paper 51, Federal Reserve Bank of Dallas.
  3. Erceg, Christopher & Lindé, Jesper, 2012. "Fiscal Consolidation in a Currency Union: Spending Cuts vs. Tax Hikes," CEPR Discussion Papers 9155, C.E.P.R. Discussion Papers.
  4. Soldatos, Gerasimos T., 2014. "A Fiscal-Monetary Policy Scheme Against Greek Indebtedness and Impoverishment," MPRA Paper 57080, University Library of Munich, Germany.

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