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Monetary and fiscal interactions in open economies

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Author Info
Giovanni Lombardo () (Deutsche Bundesbank, Postfach 100602, D-60006 Frankfurt am Main, Germany.)
Alan Sutherland () (Department of Economics, University of St Andrews, St Andrews, Fife, KY16 9AL, UK.)

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Abstract

A two-country sticky-price model is used to analyse the interactions between fiscal and monetary policy. The role of an ‘activist’ fiscal policy as a stabilisation tool is considered and a measure of the welfare gains from international fiscal policy cooperation is derived. It is found that welfare gains from fiscal cooperation do exist provided monetary policy is set cooperatively. There are also welfare gains from fiscal policy cooperation in a monetary union. However, it is found that a ‘non-activist’ fiscal policy can be better than non-cooperative fiscal policy when the international correlation of shocks is strongly negative. And non-cooperative fiscal policy can be better than cooperative fiscal policy if monetary policy is not set cooperatively. JEL Classification: E52; E58; F42.

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Paper provided by European Central Bank in its series Working Paper Series with number 289.

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Length: 43 pages
Date of creation: Nov 2003
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Handle: RePEc:ecb:ecbwps:20030289

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Keywords: Fiscal and monetary policy; policy coordination.;

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This paper has been announced in the following NEP Reports: 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.:
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  7. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August. [Downloadable!] (restricted)
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  14. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Alan Sutherland, 2002. "International monetary policy coordination and financial market integration," International Finance Discussion Papers 751, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  16. Michael B. Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility," Working Papers 042000, Hong Kong Institute for Monetary Research. [Downloadable!]
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  17. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?," NBER Working Papers 8765, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
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  19. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and Fiscal Policy Interactions in a Micro-Funded Model of a Monetary Union," CEPR Discussion Papers 3591, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  20. Lombardo, Giovanni & Sutherland, Alan, 2006. "Policy instrument choice and non-coordinated monetary policy in interdependent economies," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 855-873, October. [Downloadable!] (restricted)
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  21. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787.
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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. Tommaso Monacelli & Jordi Galí, 2005. "Optimal Monetary and Fiscal Policy in a Currency Union," Working Papers 300, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
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  2. Campbell Leith & Simon Wren-Lewis, 2007. "Fiscal Sustainability in a New Keynesian Model," Economics Series Working Papers 310, University of Oxford, Department of Economics. [Downloadable!]
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  3. Hubert Kempf & Leopold von Thadden, 2008. "On policy interactions among nations. When do cooperation and commitment matter?," Working Paper Series 880, European Central Bank. [Downloadable!]
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  4. Sabina Pogorelec, 2006. "Fiscal and monetary policy in the enlarged European Union," Working Paper Series 655, European Central Bank. [Downloadable!]
  5. Gianluca Benigno & Bianca De Paoli, 2009. "On the International Dimension of Fiscal Policy," CEP Discussion Papers dp0905, Centre for Economic Performance, LSE. [Downloadable!]
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  6. Oliver Grimm & Stefan Ried, 2007. "Macroeconomic Policy in a Heterogeneous Monetary Union," SFB 649 Discussion Papers SFB649DP2007-028, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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  7. Jordi Gali & Tommaso Monacelli, 2005. "Optimal fiscal policy in a monetary union," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
  8. Günter Coenen & Giovanni Lombardo & Frank Smets & Roland Straub, 2007. "International Transmission and Monetary Policy Cooperation," NBER Chapters, in: International Dimensions of Monetary Policy National Bureau of Economic Research, Inc. [Downloadable!]
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  9. Herings P. Jean-Jacques & Peeters Ronald & Yang Michael S., 2009. "Piracy on the internet: Accommodate it or fight it? A dynamic approach," Research Memoranda 034, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  10. Gilbert Koenig & Irem Zeyneloglu, 2008. "Monetary and Fiscal Policy Efficiency and Coordination in an Open-Economy General Equilibrium Model with Three Production Sectors," Working Papers of BETA 2008-05, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
  11. Giovanni Ganelli, 2008. "Public Spending Management and Macroeconomic Interdependence," Open Economies Review, Springer, vol. 19(2), pages 241-259, April. [Downloadable!] (restricted)
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  12. Matthew Canzoneri, 2007. "Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models," Money Macro and Finance (MMF) Research Group Conference 2006 165, Money Macro and Finance Research Group. [Downloadable!]
  13. Beetsma, Roel & Jensen, Henrik, 2003. "Mark-Up Fluctuations and Fiscal Policy Stabilization in a Monetary Union," CEPR Discussion Papers 4020, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Campbell Leith & Simon Wren-lewis, 2006. "The Costs of Fiscal Inflexibility," WEF Working Papers 0005, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
  15. Kirsanova, Tatiana & Satchi, Mathan & Vines, David & Wren-Lewis, Simon, 2006. "Optimal Fiscal Policy Rules in a Monetary Union," CEPR Discussion Papers 5533, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  16. 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 CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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