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Monetary Union: Fiscal Stabilisation In The Face Of Asymmetric Shocks

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  • Mathan Satchi
  • Tatiana Kirsanova
  • David Vines

Abstract

This Paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2004 with number 153.

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Date of creation: 17 Sep 2004
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Handle: RePEc:ecj:ac2004:153

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  17. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
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Cited by:
  1. Margarida Duarte & Alexander L. Wolman, 2003. "Fiscal policy and regional inflation in a currency union," Working Paper 03-11, Federal Reserve Bank of Richmond.
  2. Margarida Duarte & Alexander L. Wolman, 2002. "Regional inflation in a currency union: fiscal policy vs. fundamentals," International Finance Discussion Papers 746, Board of Governors of the Federal Reserve System (U.S.).
  3. Andrew Blake & Tatiana Kirsanova, 2004. "Non-cooperative Monetary and Fiscal Policy: The Value of Leadership," Money Macro and Finance (MMF) Research Group Conference 2004 84, Money Macro and Finance Research Group.

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