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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 the 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 analyze 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 extent to which a coordinate fiscal policy may influence the performance and evolution of the monetary union.

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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. Patrick J. Kehoe, 1986. "Coordination of fiscal policies in a world economy," Staff Report 98, Federal Reserve Bank of Minneapolis.
  2. Bayoumi, Tamim & Eichengreen, Barry, 1992. "Shocking Aspects of European Monetary Unification," CEPR Discussion Papers 643, C.E.P.R. Discussion Papers.
  3. Guido Tabellini, 1988. "Domestic Politics and the International Coordination of Fiscal Policies," UCLA Economics Working Papers 529, UCLA Department of Economics.
  4. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
  5. Carmen Díaz Roldán, 2000. "International monetary policy coordination under asymmetric shocks," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0002, Departamento de Economía - Universidad Pública de Navarra.
  6. Carmen Díaz-Roldán, . "Coordination of Fiscal Policies in a Monetary Union," Working Papers on International Economics and Finance 00-09, FEDEA.
  7. Stephen J. Turnovsky, 1989. "The Gains from Fiscal Cooperation in the Two Commodity Real Trade Model," NBER Working Papers 2466, National Bureau of Economic Research, Inc.
  8. 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, vol. 9(3), pages 265-284, July.
  9. Buiter, W.H. & Corsetti, G. & Roubini, N., 1992. "Excessive Deficits: Sense and Nonsence in the Treaty of Maastricht," Papers 674, Yale - Economic Growth Center.
  10. 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.
  11. Nickell, Stephen J, 1990. "Unemployment: A Survey," Economic Journal, Royal Economic Society, vol. 100(401), pages 391-439, June.
  12. Maurice Obstfeld & Giovanni Peri, 1998. "Regional non-adjustment and fiscal policy," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 205-259, 04.
  13. Barry Eichengreen & Charles Wyplosz, 1998. "The Stability Pact: more than a minor nuisance?," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 65-113, 04.
  14. van Aarle, Bas & Huart, Florence, 1999. "Monetary and fiscal unification in the EU: a stylized analysis," Journal of Economics and Business, Elsevier, vol. 51(1), pages 49-66, January.
  15. Dixon, Huw David & Santoni, Michele, 1997. "Fiscal Policy Coordination with Demand Spillovers and Unionised Labour Markets," Economic Journal, Royal Economic Society, vol. 107(441), pages 403-17, March.
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Cited by:
  1. Carmen Díaz-Roldán, . "Coordination of Fiscal Policies in a Monetary Union," Working Papers on International Economics and Finance 00-09, FEDEA.
  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 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, 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 ECO2006/9, European University Institute.

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