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Asymmetric Shocks in a Currency Union with Monetary and Fiscal Handcuffs

In: NBER International Seminar on Macroeconomics 2010

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  • Christopher J. Erceg
  • Jesper Lindé

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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This chapter was published in:

  • Richard Clarida & Francesco Giavazzi, 2011. "NBER International Seminar on Macroeconomics 2010," NBER Books, National Bureau of Economic Research, Inc, number clar10-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12213.

    Handle: RePEc:nbr:nberch:12213

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    1. Anderson, Gary & Moore, George, 1985. "A linear algebraic procedure for solving linear perfect foresight models," Economics Letters, Elsevier, Elsevier, vol. 17(3), pages 247-252.
    2. Troy Davig, Eric Leeper, 2009. "Monetary-Fiscal Policy Interactions And Fiscal Stimulus," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2009-010, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
    3. Gauti B. Eggertsson, 2005. "Great expectations and the end of the depression," Staff Reports, Federal Reserve Bank of New York 234, Federal Reserve Bank of New York.
    4. Cogan, John F. & Cwik, Tobias & Taylor, John B. & Wieland, Volker, 2009. "New Keynesian versus old Keynesian government spending multipliers," Working Paper Series, European Central Bank 1090, European Central Bank.
    5. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2007. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," Working Paper Series 214, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2011.
    6. Domeij, David & Floden, Martin, 2001. "The labor-supply elasticity and borrowing constraints: Why estimates are biased," Working Paper Series in Economics and Finance 480, Stockholm School of Economics.
    7. Adam, Klaus & Billi, Roberto M, 2006. "Monetary Conservatism and Fiscal Policy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5740, C.E.P.R. Discussion Papers.
    8. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    9. Erceg, Christopher & Guerriei, Luca & Gust, Christopher, 2006. "SIGMA: A New Open Economy Model for Policy Analysis," MPRA Paper 813, University Library of Munich, Germany.
    10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
    11. Gauti B. Eggertsson, 2011. "What Fiscal Policy is Effective at Zero Interest Rates?," NBER Chapters, in: NBER Macroeconomics Annual 2010, Volume 25, pages 59-112 National Bureau of Economic Research, Inc.
    12. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 345-370, April.
    13. Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2007. "Shocks, structures or monetary policies? The euro area and US after 2001," Working Paper Series, European Central Bank 0774, European Central Bank.
    14. Martin Bodenstein & Christopher J. Erceg & Luca Guerrieri, 2009. "The effects of foreign shocks when interest rates are at zero," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 983, Board of Governors of the Federal Reserve System (U.S.).
    15. Malin Adolfson & Stefan Laséen & Jesper Lindé & Mattias Villani, 2005. "The Role of Sticky Prices in an Open Economy DSGE Model: A Bayesian Investigation," Journal of the European Economic Association, MIT Press, MIT Press, vol. 3(2-3), pages 444-457, 04/05.
    16. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    17. Thomas Laubach, 2010. "Fiscal Policy and Interest Rates: The Role of Sovereign Default Risk," NBER Chapters, in: NBER International Seminar on Macroeconomics 2010, pages 7-29 National Bureau of Economic Research, Inc.
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    Cited by:
    1. Soldatos, Gerasimos T., 2014. "A Fiscal-Monetary Policy Scheme Against Greek Indebtedness and Impoverishment," MPRA Paper 57080, University Library of Munich, Germany.
    2. Erceg, Christopher & Lindé, Jesper, 2012. "Fiscal Consolidation in a Currency Union: Spending Cuts vs. Tax Hikes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9155, C.E.P.R. Discussion Papers.
    3. Ippei Fujiwara & Kozo Ueda, 2010. "The Fiscal Multiplier and Spillover in a Global Liquidity Trap," IMES Discussion Paper Series 10-E-03, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Javier Andrés & J.E. Boscá & Javier Ferri, 2014. "Instruments, rules and household debt: the effects of fiscal policy," Working Papers, International Economics Institute, University of Valencia 1401, International Economics Institute, University of Valencia.

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