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Monetary and fiscal policy interaction in the Euro area with different assumptions on the Phillips curve

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  • Bofinger, Peter
  • Mayer, Eric

Abstract

In this paper we carry over a static version of a New Keynesian Macro Model developed in previous papers (see Bofinger, Mayer, and Wollmershäuser 2002) to a monetary union. For a similar approach see (Uhlig 2002). We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are in a vulnerable position exposed to asymmetric shocks and therefore in need for fiscal policy as an independent stabilization agent with room to breath. --

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Bibliographic Info

Paper provided by University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 40.

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Date of creation: 2003
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Handle: RePEc:zbw:wuewep:40

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Keywords: Monetary policy; inflation targeting; fiscal policy; policy coordination; free-riding;

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References

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  1. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2001. "Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence," Working Papers 2002_13, Business School - Economics, University of Glasgow, revised Oct 2002.
  2. Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series 0388, European Central Bank.
  3. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  4. Uhlig, Harald, 2002. "One Money, but Many Fiscal Policies in Europe: What Are the Consequences?," CEPR Discussion Papers 3296, C.E.P.R. Discussion Papers.
  5. Van Aarle B. & Di Bartolomeo G. & Engwerda J. & Plasmans J., 2002. "Staying together or breaking apart: Policy-makers' endogenous coalitions formation in the European economic and monetary Union," Working Papers 2002013, University of Antwerp, Faculty of Applied Economics.
  6. Mundschenk, Susanne & Hagen, Jürgen von, 2002. "Fiscal and Monetary Policy Coordination in EMU," Working Papers 70, Oesterreichische Nationalbank (Austrian Central Bank).
  7. Orphanides, Athanasios & Wilcox, David W, 2002. "The Opportunistic Approach to Disinflation," International Finance, Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
  8. Canova, Fabio & Pappa, Evi, 2003. "Price Dispersions in Monetary Unions: The Role of Fiscal Shocks," CEPR Discussion Papers 3746, C.E.P.R. Discussion Papers.
  9. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 0166, European Central Bank.
  10. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
  11. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
  12. Fabio Busetti & Lorenzo Forni & Andrew Harvey & Fabrizio Venditti, 2007. "Inflation Convergence and Divergence within the European Monetary Union," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 95-121, June.
  13. Dornbusch, Rudi, 1997. "Fiscal Aspects of Monetary Integration," American Economic Review, American Economic Association, vol. 87(2), pages 221-23, May.
  14. Orphanides, Athanasios & Wieland, Volker, 2000. "Inflation zone targeting," European Economic Review, Elsevier, vol. 44(7), pages 1351-1387, June.
  15. Mongelli, Francesco Paolo, 2002. "ìNew" Views on the Optimum Currency Area Theory: What is EMU Telling US?," Royal Economic Society Annual Conference 2002 140, Royal Economic Society.
  16. Peter Bofinger & Eric Mayer & Timo Wollmersh�user, 2006. "The BMW Model: A New Framework for Teaching Monetary Economics," The Journal of Economic Education, Taylor & Francis Journals, vol. 37(1), pages 98-117, January.
  17. Coenen, Günter, 2003. "Zero lower bound: is it a problem in the euro area?," Working Paper Series 0269, European Central Bank.
  18. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  19. 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.
  20. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo & Hülsewig, Oliver & Schmidt, Robert, 2002. "The BMW model: A new framework for teaching monetary macroeconomics in closed and open economies," W.E.P. - Würzburg Economic Papers 34, University of Würzburg, Chair for Monetary Policy and International Economics.
  21. Demertzis, Maria & Hughes Hallett, Andrew, 1999. "An Independent Central Bank Faced With Elected Governments," CEPR Discussion Papers 2219, C.E.P.R. Discussion Papers.
  22. Bofinger, Peter & Mayer, Eric & Wollmershäuser, Timo, 2002. "The BMW model: simple macroeconomics for closed and open economies a requiem for the IS/LM-AS/AD and the Mundell-Fleming model," W.E.P. - Würzburg Economic Papers 35, University of Würzburg, Chair for Monetary Policy and International Economics.
  23. A. Robert Nobay & David A. Peel, 2003. "Optimal Discretionary Monetary Policy in a Model of Asymmetric Central Bank Preferences," Economic Journal, Royal Economic Society, vol. 113(489), pages 657-665, 07.
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Cited by:
  1. Sell, Friedrich L., 2005. "Zins- und Geldmengensteuerung in der offenen Volkswirtschaft: Eine Referenz an William Poole (und zugleich eine Kritik an der "Neuen Keynesianischen Makroökonomik")," Working Papers in Economics 2005,2, Universität der Bundeswehr München, Economic Research Group.

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