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The interaction of fiscal and monetary policy in a monetary union : Balancing credibility and flexibility

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  • Beetsma, R.M.W.J.
  • Bovenberg, A.L.

    (Tilburg University, School of Economics and Management)

Abstract

This paper explores how decentralized, national fiscal policies interact with a common monetary policy in a monetary union. We show that fiscal policy plays a more important ro le in stabilizing country-specific shocks than with national monetary policies. Whereas monetary u nification with an optimally designed central bank reduces both expected inflation and the varia nce of inflation, it harms overall welfare by reducing output and public spending and increasing the variability of these variables. However, international transfers may avoid this decline in welf are.
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Suggested Citation

  • Beetsma, R.M.W.J. & Bovenberg, A.L., 1995. "The interaction of fiscal and monetary policy in a monetary union : Balancing credibility and flexibility," Other publications TiSEM f6a15171-b493-42a5-ac41-8, Tilburg University, School of Economics and Management.
    • Handle: RePEc:tiu:tiutis:f6a15171-b493-42a5-ac41-8000cf3fa71d
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    1. Beetsma, Roel M. W. J. & Bovenberg, A. Lans, 1999. "Does monetary unification lead to excessive debt accumulation?," Journal of Public Economics, Elsevier, vol. 74(3), pages 299-325, December.
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    5. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1997. "Designing fiscal and monetary institutions in a second-best world," European Journal of Political Economy, Elsevier, vol. 13(1), pages 53-79, February.
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    10. Cukierman Alex, 1992. "Central Bank Strategy, Credibility, And Independance: Theory And Evidence," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 3(4), pages 1-10, December.
    11. von Hagen, Jurgen & Suppel, Ralph, 1994. "Central bank constitutions for federal monetary unions," European Economic Review, Elsevier, vol. 38(3-4), pages 774-782, April.
    12. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    13. Alesina, Alberto & Tabellini, Guido, 1987. "Rules and Discretion with Noncoordinated Monetary and Fiscal Policies," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 619-630, October.
    14. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
    15. Guillermo A. Calvo & Pablo E. Guidotti, 1993. "On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 667-687.
    16. Levine, Paul, 1993. "Fiscal Policy Co-ordination under EMU and the Choice of Monetary Instrument," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(0), pages 1-12, Suppl..
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    Cited by:

    1. Thierry Warin, 2004. "Should Europe Get Rid of the Stability and Growth Pact?," Middlebury College Working Paper Series 0415, Middlebury College, Department of Economics.
    2. repec:kap:iaecre:v:11:y:2005:i:1:p:29-38 is not listed on IDEAS
    3. Thierry Warin, 2005. "Stability and Growth Pact: An Index to Trigger an Early Warning Earlier?," Middlebury College Working Paper Series 0502, Middlebury College, Department of Economics.
    4. Uhlig, Harald, 1997. "Long Term Debt and the Political Support of a Monetary Union," CEPR Discussion Papers 1603, C.E.P.R. Discussion Papers.
    5. André Fourçans & Thierry Warin, 2007. "Stability and Growth Pact II: Incentives and Moral Hazard," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 10(1), pages 51-62.
    6. André Fourçans & Thierry Warin, 2007. "Stability and Growth Pact II: Incentives and Moral Hazard," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 10(1), pages 51-62.
    7. Thierry Warin, 2005. "The Hidden Structural Features of the Fiscal Rule: A European Saga," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(1), pages 29-38, February.
    8. Paolo Biraschi, "undated". "Searching for the optimal EMU fiscal rule:an ex-post analysis of the SGP reform proposals," Working Papers wp2008-7, Department of the Treasury, Ministry of the Economy and of Finance.
    9. Marco Lossani & Piergiovanna Natale & Patrizio Tirelli, 2001. "Fiscal Policy and Inflation Targets: Does Credibility Matter?," Economia politica, Società editrice il Mulino, issue 3, pages 371-392.
    10. Grzegorz Poniatowski, 2014. "Common Currency and Determinants of Government Bond Risk Premiums," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 6(2), pages 70-87, June.
    11. Thierry Warin, 2005. "A Note on International Fiscal Policy Practices," Middlebury College Working Paper Series 0520, Middlebury College, Department of Economics.
    12. Uhlig, H.F.H.V.S., 1997. "Long Term Debt and the Political Support for a Monetary Union," Other publications TiSEM ce87feec-a476-404f-90d2-b, Tilburg University, School of Economics and Management.

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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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