Fiscal Policy in a Monetary Union: Can Fiscal Cooperation be Counterproductive?

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Fiscal Policy in a Monetary Union: Can Fiscal Cooperation be Counterproductive?

Author Info

Luisa Lambertini (University of Surrey)
Paul Levine (University of Surrey)
Joseph Pearlman (London Metropolitan University)

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Abstract

We analyze the interaction of monetary and fiscal policies in a monetary union where the common central bank is more conservative than the fiscal authorities. When monetary and fiscal policies are discretionary, we find that the Nash equilibrium is sub-optimal with higher output and lower inflation than the cooperative Ramsey op- timum. In a further example of counterproductive cooperative, we find that fiscal cooperation makes matters worse. We also examine cooperative and non-cooperative fiscal policy in the case where the central bank can commit and has the same prefer- ences as the fiscal authorities.

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Publisher Info
Paper provided by Department of Economics, University of Surrey in its series Department of Economics Discussion Papers with number 1707.

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Length: 26 pages
Date of creation: Nov 2007
Date of revision:
Handle: RePEc:sur:surrec:1707

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Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-12-01 (All new papers)
NEP-CBA-2007-12-01 (Central Banking)
NEP-MAC-2007-12-01 (Macroeconomics)
NEP-MON-2007-12-01 (Monetary Economics)

References listed on IDEAS
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Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May. [Downloadable!] (restricted)
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Other versions:
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