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

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  • Beetsma, R.M.W.J.
  • Bovenberg, A.L.

    (Tilburg University, Center for Economic Research)

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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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-101.

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

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Web page: http://center.uvt.nl

Related research

Keywords: Central Banks; Monetary Policy; Stabilization; Monetary Integration; Credibility; Fiscal Policy; monetary economics;

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References

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  1. Calvo, Guillermo A & Guidotti, Pablo E, 1993. "On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 667-87, July.
  2. Morales, A.J. & Padilla, A.J., 1995. "Designing Institutions for International Monetary Policy Coordination," Papers 9503, Centro de Estudios Monetarios Y Financieros-.
  3. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
  4. Laskar, Daniel, 1989. "Conservative central bankers in a two-country world," European Economic Review, Elsevier, vol. 33(8), pages 1575-1595, October.
  5. Beetsma, Roel & Bovenberg, A Lans, 1995. "Does Monetary Unification Lead to Excessive Debt Accumulation?," CEPR Discussion Papers 1299, C.E.P.R. Discussion Papers.
  6. 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.
  7. 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.
  8. Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "Designing fiscal and monetary institutions in a second-best world," Discussion Paper 1995-47, Tilburg University, Center for Economic Research.
  9. 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.
  10. Levine, Paul, 1993. "Fiscal Policy Co-ordination under EMU and the Choice of Monetary Instrument," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 1-12, Suppl..
  11. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  12. Eijffinger, S.C.W. & Schaling, E., 1995. "The ultimate determinants of central bank independence," Discussion Paper 1995-5, Tilburg University, Center for Economic Research.
  13. 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.
  14. 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.
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Cited by:
  1. 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.
  2. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics.
  3. Thierry Warin, 2005. "A Note on International Fiscal Policy Practices," Middlebury College Working Paper Series 0520, Middlebury College, Department of Economics.
  4. 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.
  5. Paolo Biraschi, . "Searching for the optimal EMU fiscal rule:an ex-post analysis of the SGP reform proposals," Working Papers wp2008-7, Department of the Treasury, Ministry of the Economy and of Finance.
  6. Uhlig, H.F.H.V.S., 1997. "Long Term Debt and the Political Support for a Monetary Union," Discussion Paper 1997-13, Tilburg University, Center for Economic Research.

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