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Fiscal policy coordination and flexibility under European Monetary Union: implications for macroeconomic stabilization

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  • Jay H. Bryson
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    Abstract

    Some writers have proposed that under European Monetary Union fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. The paper shows that, in theory, fiscal policy coordination may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the Multi-Country Model of the Federal Reserve Board. The results suggest that fiscal policy coordination under EMU may require more fiscal activism rather than less. The results also show that, regardless of the shock, fiscal policy coordination among EMU members provides more macroeconomic stabilization to the United States. However, due to the small spillovers between the EC and the United States, the magnitude of this increased stabilization is relatively trivial.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/467/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/467/ifdp467.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 467.

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    Date of creation: 1994
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    Handle: RePEc:fip:fedgif:467

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    Related research

    Keywords: European Monetary System (Organization) ; Fiscal policy;

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    Cited by:
    1. Onorante, Luca & Pedregal, Diego J. & Pérez, Javier J. & Signorini, Sara, 2010. "The usefulness of infra-annual government cash budgetary data for fiscal forecasting in the euro area," Journal of Policy Modeling, Elsevier, vol. 32(1), pages 98-119, January.
    2. 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.
    3. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics.
    4. Jensen, Svend Erik Hougaard & Jensen, Lars Grue, 1995. "Debt, deficits and transition to EMU: A small country analysis," European Journal of Political Economy, Elsevier, vol. 11(1), pages 3-25, March.

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