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Coordination of Fiscal Policies in a Monetary Union

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  • Carmen Díaz-Roldán

Abstract

This paper examines how the member countries of a monetary union react to country-specific shocks and to shocks from the rest of the world, when te budget deficit is the only policy instrument available. We develop a three-country model in which countries show different preferences regarding objectives, and face asymmetric disturbances. Two of the countries form a monetary union where an independent central bank controls monetary policy, and fiscal policy is determined by fiscal authorities at the national level. In this framework, we analyse in strategic terms how authorities can deal with monetary, real and supply shocks using fiscal policy with stabilizing purposes. Finally, we discuss the welfare aspects of the optimal solution and the extent to which a coordinated fiscal policy may influence the performance and evlution of the monetary union. Classification-JEL: E61, E62, F42

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Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 00-09.

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Handle: RePEc:fda:fdadef:00-09

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  1. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
  2. Stephen J. Turnovsky, 1987. "The Gains from Fiscal Cooperation in the Two Commodity Real Trade Model," NBER Working Papers 2466, National Bureau of Economic Research, Inc.
  3. Carmen Díaz Roldán, 2000. "International monetary policy coordination under asymmetric shocks," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra, Departamento de Economía - Universidad Pública de Navarra 0002, Departamento de Economía - Universidad Pública de Navarra.
  4. Buiter, Willem H & Corsetti, Giancarlo & Roubini, Nouriel, 1992. "`Excessive Deficits': Sense and Nonsense in the Treaty of Maastricht," CEPR Discussion Papers, C.E.P.R. Discussion Papers 750, C.E.P.R. Discussion Papers.
  5. Joseph Daniels & David VanHoose, 1998. "Two-Country Models of Monetary and Fiscal Policy: What Have We Learned? What More Can We Learn?," Open Economies Review, Springer, Springer, vol. 9(3), pages 265-284, July.
  6. Dixon, Huw David & Santoni, Michele, 1997. "Fiscal Policy Coordination with Demand Spillovers and Unionised Labour Markets," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 107(441), pages 403-17, March.
  7. Driver, Rebecca L & Wren-Lewis, Simon, 1999. "European Monetary Union and Asymmetric Shocks in a New Keynesian Model," Oxford Economic Papers, Oxford University Press, vol. 51(4), pages 665-88, October.
  8. Kehoe, Patrick J., 1987. "Coordination of fiscal policies in a world economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 19(3), pages 349-376, May.
  9. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199279173, October.
  10. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 65-113, 04.
  11. Guido Tabellini, 1988. "Domestic Politics and the International Coordination of Fiscal Policies," UCLA Economics Working Papers, UCLA Department of Economics 529, UCLA Department of Economics.
  12. Carmen Díaz-Roldán, . "Coordination of Fiscal Policies in a Monetary Union," Working Papers on International Economics and Finance, FEDEA 00-09, FEDEA.
  13. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 205-259, 04.
  14. Nickell, Stephen J, 1990. "Unemployment: A Survey," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 100(401), pages 391-439, June.
  15. van Aarle, Bas & Huart, Florence, 1999. "Monetary and fiscal unification in the EU: a stylized analysis," Journal of Economics and Business, Elsevier, Elsevier, vol. 51(1), pages 49-66, January.
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Cited by:
  1. Carmen Díaz-Roldán, 2000. "Coordination Of Fiscal Policies In A Monetary Union," Working Papers, Asociación Española de Economía y Finanzas Internacionales 00-09, Asociación Española de Economía y Finanzas Internacionales.
  2. Mª Carmen Díaz Roldán, 2002. "On the Desirability of Supply-Side Intervention in a Monetary Union," Economic Working Papers at Centro de Estudios Andaluces, Centro de Estudios Andaluces E2002/21, Centro de Estudios Andaluces.
  3. Carmen Díaz - Roldan, 2003. "Supply-policy coordination in a monetary union," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 18(2), pages 163-179.
  4. Luca Onorante, 2006. "Interaction of Fiscal Policies on the Euro Area: How Much Pressure on the ECB?," Economics Working Papers, European University Institute ECO2006/9, European University Institute.

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