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Fiscal Stabilization Policy in a Monetary Union with Inflation Targeting

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Author Info
Andersen, Torben M
Abstract

The interaction between a common monetary policy targeting inflation and decentralized fiscal policies aiming at output stability is considered in a setting taking into account interdependencies between countries running via trade links and the common monetary policy. The setting is sufficiently general to capture various effects of fiscal policy, and to allow for both demand and supply shocks, which can be either aggregate or idiosyncratic. It is shown that a policy mix problem arises between the common monetary policy and the decentralized fiscal policy, which results in an inappropriate stabilization of shocks. In the case of aggregate shocks the inefficiency in responding to shocks is increasing in the number of member countries, while it is decreasing in the case of idiosyncratic shocks. Numerical illustrations show that the cost of non-cooperative fiscal policies can be large in the case of aggregate shocks, while they are small in the case of idiosyncratic shocks, provided that fiscal policy can be flexibly adjusted to cope with idiosyncratic shocks.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3232.

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Date of creation: Feb 2002
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Handle: RePEc:cpr:ceprdp:3232

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Keywords: emu policy cooperation policy-mix shocks

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-34, June. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
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  4. Beetsma, Roel & Debrun, Xavier & Klaassen, Frank, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
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  5. Andersen, Torben M & Spange, Morten, 2002. "International Interdependencies in Fiscal Stabilization Policies," CEPR Discussion Papers 3580, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers 1249, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  7. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Beetsma, R. & Bovenberg, L., 1995. "Does monetary unification lead to excessive debt accumulation," Discussion Paper 112, Tilburg University, Center for Economic Research. [Downloadable!]
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  9. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Monetary Union without Fiscal Coordination May Discipline Policymakers," DELTA Working Papers 95-22, DELTA (Ecole normale supérieure).
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  10. Laurence Ball, 1998. "Policy Rules for Open Economies," RBA Research Discussion Papers rdp9806, Reserve Bank of Australia. [Downloadable!]
  11. Dixit, Avinash, 2001. "Games of monetary and fiscal interactions in the EMU," European Economic Review, Elsevier, vol. 45(4-6), pages 589-613, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Evi Pappa, . "The Unbearable Tightness of Being in a Monetary Union: Fiscal Restrictions and Regional Stability"," Working Papers 294, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  2. Agnes Benassy-Quere, 2006. "Short-Term Fiscal Spillovers in a Monetary Union," Working Papers 2006-13, CEPII research center. [Downloadable!]
  3. Moïse Sidiropoulos & Eleftherios Spyromitros, 2006. "Fiscal Policy in a Monetary Union Under Alternative Labour-Market Structures," Working Papers of BETA 2006-25, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  4. Xavier Debrun & Paul R. Masson & Catherine A. Pattillo, 2003. "Monetary Union in West Africa: Who Might Gain, Who Might Lose, and Why?," IMF Working Papers 02/226, International Monetary Fund. [Downloadable!]
    Other versions:
  5. Jochen Michaelis & Michael Pflüger, 2002. "Euroland: Besser als befürchtet, aber schlechter als erhofft?," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 71(3), pages 296-311. [Downloadable!] (restricted)
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