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Fiscal and Monetary Policy Coordination in EMU

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  • Jürgen von Hagen
  • Susanne Mundschenk

Abstract

The purpose of this paper is to analyze and discuss the coordination of fiscal and monetary policies in EMU. In section 2, we develop a framework for studying monetary and fiscal policy in a monetary union to explore the implications of the common currency for policy coordination. We show that there is little need for coordinating monetary and fiscal policies in the long run. In section 3, we study the interaction of monetary and fiscal policies in the short run. A monetary policy firmly committed to price stability at the EMU level implies that the central bank controls aggregate output at the euro-area level, while national fiscal policies determine the distribution of aggregate demand across the participating countries. Thus, national governments are engaged in a purely distributional game with inefficient outcomes unless policies are coordinated. If monetary policy also pursues a goal of output stabilization, policy coordination should include the central bank together with the fiscal authorities. We also show that the proposal to restrict fiscal policies to the operation automatic stabilizers at the national level, which is now often made in EMU, does not solve the issue of policy coordination. Instead, it worsens the situation of the central bank unless automatic stabilizers are identical in all member economies. In section 4, we review the existing mechanisms for policy coordination and show that they are deficient, since they focus on the long run rather than the short run and largely ignore the interdependence of national economic policies and the ECB’s monetary policy. Section 5 concludes.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 194.

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Date of creation: Dec 2002
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Handle: RePEc:chb:bcchwp:194

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  1. Patrick, John D., 1973. "Establishing convergent decentralized policy assignment," Journal of International Economics, Elsevier, vol. 3(1), pages 37-51, February.
  2. Beetsma, Roel & Bovenberg, A Lans, 1995. "Designing Fiscal and Monetary Institutions for a European Monetary Union," CEPR Discussion Papers 1303, C.E.P.R. Discussion Papers.
  3. Sibert, Anne & Sutherland, Alan, 2000. "Monetary union and labor market reform," Journal of International Economics, Elsevier, vol. 51(2), pages 421-435, August.
  4. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
  5. 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.
  6. Uhlig, H.F.H.V.S., 2002. "One Money, But Many Fiscal Policies in Europe: What are the Consequences?," Discussion Paper, Tilburg University, Center for Economic Research 2002-32, Tilburg University, Center for Economic Research.
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Citations

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Cited by:
  1. Eijffinger, Sylvester C W & Governatori, Matteo, 2004. "Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU," CEPR Discussion Papers 4647, C.E.P.R. Discussion Papers.
  2. Carlo Panico & Francesco Purificato, 2012. "The Role of Institutional and Political Factors in the European Debt Crisis," Working Papers wp280, Political Economy Research Institute, University of Massachusetts at Amherst.
  3. Pappa, Evi & Vassilatos, Vanghelis, 2007. "The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability," European Economic Review, Elsevier, vol. 51(6), pages 1492-1513, August.
  4. Carlos Vieira & Isabel Vieira & Sofia Costa, 2003. "Monetary and Fiscal Policies in EMU: some relevant issues," Eastward Enlargement of the Euro-zone Working Papers wp17f, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Mar 2003.
  5. repec:ebl:ecbull:v:5:y:2008:i:34:p:1-12 is not listed on IDEAS
  6. Claudiu T. Albulescu & Cornel Oros, 2014. "The policy-mix in the Euro Area: The Role of Financial Stability," Economics Bulletin, AccessEcon, vol. 34(2), pages 705-717.
  7. Bofinger, Peter & Mayer, Eric, 2003. "Monetary and fiscal policy interaction in the Euro area with different assumptions on the Phillips curve," W.E.P. - Würzburg Economic Papers 40, University of Würzburg, Chair for Monetary Policy and International Economics.
  8. Cornel Oros, 2008. "Macroeconomic stabilization in a heterogeneous monetary union: some insights into the effects of fiscal policy coordination," Economics Bulletin, AccessEcon, vol. 5(34), pages 1-12.
  9. Sell, Friedrich L., 2003. "Die Stabilitätsprogramme der EU: Anspruch und Wirklichkeit in den ersten vier Jahren der Europäischen Währungsunion," Working Papers in Economics 2003,2, Universität der Bundeswehr München, Economic Research Group.
  10. Tariq Mahmood & Maqbool Hussain Sial, 2011. "The Relative Effectiveness of Monetary and Fiscal Policies in Economic Growth: A Case Study of Pakistan," Asian Economic and Financial Review, Asian Economic and Social Society, Asian Economic and Social Society, vol. 1(4), pages 236-244, December.
  11. Alexander Mihailov & Katrin Ullrich, 2008. "Independence and Accountability of Monetary and Fiscal Policy Committees," Economics & Management Discussion Papers, Henley Business School, Reading University em-dp2008-72, Henley Business School, Reading University.
  12. Cornel Oros, 2009. "Economic Governance in an Asymmetric Monetary Union: A Fiscal Policy Game Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 39-60.
  13. Virginie Traclet, 2004. "Monetary and Fiscal Policies in Canada: Some Interesting Principles for EMU?," Working Papers 04-28, Bank of Canada.
  14. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series 2534, CESifo Group Munich.
  15. Bofinger, Peter & Mayer, Eric, 2004. "Monetary and Fiscal Policy Interaction in the Euro Area with different assumptions on the Phillips curve," Center for European, Governance and Economic Development Research Discussion Papers 27, University of Goettingen, Department of Economics.

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