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Monetary and fiscal policy interactions in a micro-founded model of a monetary union

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Author Info
Roel M.W.J. Beetsma () (University of Amsterdam - Research Institute in Economics & Econometrics (RESAM), Roetersstraat 11, 1018 WB Amsterdam, The Netherlands.)
Henrik Jensen () (Department of Economics, University of Copenhagen, Studistraede 6, DK 1455 Copenhagen, Denmark.)

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Abstract

So far, the "new open economy macroeconomics" literature has primarily focused on monetary policy and monetary policy rules, rather than paying attention also to fiscal policy. This is an omission because, especially with the advent of EMU, the burden on fiscal policy as an instrument for macroeconomic stabilization has potentially increased. In this paper, we focus on the interactions between monetary and fiscal policy in a micro-founded model of a monetary union. By extending a two-country, New-Keynesian model with public spending, we find that the forward-looking Phillips curves depend on consumption, terms-of-trade and public spending deviations from their respective stochastic natural rates. We study the optimal coordinated monetary and fiscal policies for various settings. We also consider simple monetary and fiscal policy rules and investigate to what extent these rules can approximate the optimal solution under commitment. JEL Classification: E52; E61; E62; E62; F33.

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Paper provided by European Central Bank in its series Working Paper Series with number 166.

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Length: 43 pages
Date of creation: Aug 2002
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Handle: RePEc:ecb:ecbwps:20020166

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Related research
Keywords: Policy mix; monetary policy rules; fiscal policy rules; monetary union.;

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References listed on IDEAS
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