The paper analyzes monetary and fiscal policy efficiency and coordination in a stochastic new open economy macroeconomics (NOEM) model with three production sectors. Some or all of these sectors can be affected by unanticipated productivity shocks which can trigger monetary and fiscal policy reactions. The uncertainty over the shocks can be symmetric or asymmetric across the two countries. The paper first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative effects of unanticipated productivity shocks. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on monetary policy efficiency. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible-price equilibrium. However, their efficiency is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks. In case of high asymmetry, monetary cooperation can be counter-productive either for the home or for the foreign country.
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Paper provided by Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg in its series Working Papers of BETA with number
2008-05.
Find related papers by JEL classification: E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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