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The Macroeconomic Policy Mix in a Monetary Union with Flexible Inflation Targeting

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  • Andersen, Torben M.

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    (Department of Economics, University of Aarhus, Denmark)

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    Abstract

    Policy mix problems may arise in a monetary union with centralized monetary policy and decentralized fiscal policy. A consequence of this may be an inappropriate stabilization of shocks. This paper addresses how policy coordination problems are affected by the objectives of the monetary authority. It is shown that non-coordinated fiscal policies tend to be too counter-cyclical in the case of aggregate shocks, and that this bias can be reduced by lowering the weight to output stability in monetary policy. Oppositely, for country-specific shocks non- oordinated fiscal policies tend to be too pro-cyclical and this bias can be reduced by increasing the weight to output stability in monetary policy. Considering the assignment of policy tasks -- within the set of binding policy rules for fiscal- and monetary policy -- it is found that flexible inflation targeting dominates strict inflation targeting.

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    Bibliographic Info

    Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2003-2.

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    Length: 25
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    Handle: RePEc:aah:aarhec:2003-2

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    Web page: http://www.econ.au.dk/afn/

    Related research

    Keywords: EMU; policy-mix; shocks and policy cooperation.;

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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. Torben Andersen, 2001. "European Integration - A Downward Bias in Employment Policies?," CESifo Working Paper Series 574, CESifo Group Munich.
    3. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1998. "Monetary union without fiscal coordination may discipline policymakers," Journal of International Economics, Elsevier, vol. 45(2), pages 239-258, August.
    4. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Does Monetary Unification Lead to Excessive Debt Accumulation?," DELTA Working Papers 95-23, DELTA (Ecole normale supérieure).
    5. Beetsma, Roel M.W.J. & Jensen, Henrik, 2005. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Journal of International Economics, Elsevier, vol. 67(2), pages 320-352, December.
    6. Taylor, John B., 1999. "Staggered price and wage setting in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 15, pages 1009-1050 Elsevier.
    7. Roel M. W. J. Beetsma & Xavier Debrun & Franc Klaassen, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," IMF Working Papers 01/178, International Monetary Fund.
    8. Andersen, Torben M. & Spange, Morten, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.
    9. Leitemo, Kai, 2004. "A game between the fiscal and the monetary authorities under inflation targeting," European Journal of Political Economy, Elsevier, vol. 20(3), pages 709-724, September.
    10. Dixon, Huw, 1987. "A Simple Model of Imperfect Competition with Walrasian Features," Oxford Economic Papers, Oxford University Press, vol. 39(1), pages 134-60, March.
    11. 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.
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    Cited by:
    1. Goergens, Tue & Paldam, Martin & Würtz, Allan, . "How does Public Regulation affect Growth?," Economics Working Papers 2003-14, School of Economics and Management, University of Aarhus.
    2. Jensen, Kraen Blume & Ejrnaes, Mette & Nielsen, Helena Skyt & Würtz, Allan, . "Self-Employment among Immigrants: A Last Resort?," Economics Working Papers 2003-13, School of Economics and Management, University of Aarhus.
    3. Holler, Manfred & Skott, Peter, . "The importance of setting the agenda," Economics Working Papers 2003-8, School of Economics and Management, University of Aarhus.

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