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The interaction of fiscal and monetary policy in a monetary union : balancing credibility and flexibility

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Author Info
Beetsma, R.
Bovenberg, L. (Tilburg University, Center for Economic Research)

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Abstract

This paper explores how decentralized, national fiscal policies interact with a common monetary policy in a monetary union. We show that fiscal policy plays a more important ro le in stabilizing country-specific shocks than with national monetary policies. Whereas monetary u nification with an optimally designed central bank reduces both expected inflation and the varia nce of inflation, it harms overall welfare by reducing output and public spending and increasing the variability of these variables. However, international transfers may avoid this decline in welf are.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 101.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:1995101

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Find related papers by JEL classification:
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
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
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. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall. [Downloadable!] (restricted)
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  2. Eichengreen, Barry, 1993. "European Monetary Unification," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1321-57, September. [Downloadable!] (restricted)
  3. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March. [Downloadable!] (restricted)
  4. Thomas Krichel & Paul Levine & Joseph Pearlman, 1996. "Fiscal and monetary policy in a monetary union: Credible inflation targets or monetized debt?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(1), pages 28-54, March. [Downloadable!] (restricted)
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  5. Robert J. Barro & David B. Gordon, 1984. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Morales, A.J. & Padilla, A.J., 1995. "Designing Institutions for International Monetary Policy Coordination," Papers 9503, Centro de Estudios Monetarios Y Financieros-.
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  7. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1997. "Designing fiscal and monetary institutions in a second-best world," European Journal of Political Economy, Elsevier, vol. 13(1), pages 53-79, February. [Downloadable!] (restricted)
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  8. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
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  9. Bayoumi, Tamim, 1994. "A Formal Model of Optimum Currency Areas," CEPR Discussion Papers 968, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Süppel, Ralph & von Hagen, Jürgen, 1994. "Central Bank Constitutions for Monetary Unions," CEPR Discussion Papers 919, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Buiter, W.H. & Kletzer, K.M., 1990. "Reflections On Fiscal Implications Of Common Currency," Papers 613, Yale - Economic Growth Center.
  13. Guy Debelle, 1996. "Central Bank Independence: A Free Lunch?," IMF Working Papers 96/1, International Monetary Fund.
  14. Eijffinger, S. & Schaling, E., 1995. "The Ultimate Determinants of Central Bank Independence," Discussion Paper 5, Tilburg University, Center for Economic Research. [Downloadable!]
  15. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
  16. Beetsma, Roel & Bovenberg, A Lans, 1995. "Does Monetary Unification Lead to Excessive Debt Accumulation?," CEPR Discussion Papers 1299, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  17. Laskar, Daniel, 1989. "Conservative central bankers in a two-country world," European Economic Review, Elsevier, vol. 33(8), pages 1575-1595, October. [Downloadable!] (restricted)
  18. Alberto Alesina & Vittorio Grilli, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," NBER Working Papers 3860, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Alesina, Alberto F & Grilli, Vittorio, 1993. "On the Feasibility of a One- or Multi-Speed European Monetary Union," CEPR Discussion Papers 792, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  20. Levine, Paul L & Pearlman, Joseph, 1992. "Fiscal and Monetary Policy Under EMU: Credible Inflation Targets or Unpleasant Monetary Arithmetic?," CEPR Discussion Papers 701, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  21. Levine, Paul, 1993. "Fiscal Policy Co-ordination under EMU and the Choice of Monetary Instrument," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 61(0), pages 1-12, Suppl..
  22. Buiter, Willem H & Kletzer, Kenneth, 1990. "Reflections on the Fiscal Implications of a Common Currency," CEPR Discussion Papers 418, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  23. von Hagen, Jurgen & Suppel, Ralph, 1994. "Central bank constitutions for federal monetary unions," European Economic Review, Elsevier, vol. 38(3-4), pages 774-782, April. [Downloadable!] (restricted)
Full references

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. P.A.D. Cavelaars, 2003. "Double Discretion, International Spillovers and the WelfareImplications of Monetary Unification," DNB Staff Reports (discontinued) 85, Netherlands Central Bank. [Downloadable!]
  2. Uhlig, H., 1997. "Long term debt and the political support for a monetary union," Discussion Paper 13, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  3. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics. [Downloadable!]
  4. Thierry Warin, 2005. "The Hidden Structural Features of the Fiscal Rule: A European Saga," International Advances in Economic Research, Springer, vol. 11(1), pages 29-38, March. [Downloadable!] (restricted)
  5. Paul Cavelaars, 2000. "Double Discretion, International Spillovers and the Welfare Implications of Monetary Unification," MEB Series (discontinued) 2000-12, Netherlands Central Bank, Monetary and Economic Policy Department. [Downloadable!]
  6. Thierry Warin, 2005. "Stability and Growth Pact: An Index to Trigger an Early Warning Earlier?," Middlebury College Working Paper Series 0502, Middlebury College, Department of Economics. [Downloadable!]
  7. Thierry Warin, 2005. "A Note on International Fiscal Policy Practices," Middlebury College Working Paper Series 0520, Middlebury College, Department of Economics. [Downloadable!]
  8. P.A.D. Cavelaars, 2003. "The Welfare Cost of Structural Distortions and Stochastic Shocks," DNB Staff Reports (discontinued) 84, Netherlands Central Bank. [Downloadable!]
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