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Optimal Fiscal Policy Rules in a Monetary Union

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  • Tatiana Kirsanova

    (University of Exeter)

  • David Vines

    (Baliol College, University of Oxford)

  • Mathan Satchi

    (University of Kent)

  • Simon Wren-Lewis

    (University of Exeter)

Abstract

This paper investigates the importance of ?scal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in in?ation and non-Ricardian consumers, and derive optimal simple rules for ?scal authorities. We ?nd that ?scal policy can play an important role in reacting to in?ation, output and the terms of trade, but that not much is lost if national ?scal policy is restricted to react, on the one hand, to national di?erences in in?ation and, on the other hand, to either national di?erences in output or changes in the terms of trade. However, welfare is reduced if national ?scal policy responds only to output, ignoring in?ation.

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Bibliographic Info

Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 40.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:40

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
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  4. The UK is well ahead of the US and the EU in its use of fiscal rules
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    by Blog Admin in EUROPP European Politics and Policy on 2012-12-15 11:00:38
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