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Correcting Macroimbalances in a Monetary Union: An Evaluation of Alternative Fiscal Policy Rules


  • Lossani, M
  • Tirelli, P


In a monetary union, fiscal policy may replace exchange rate flexibility in the face of asymmetric shocks. But targets should be carefully selected: setting nominal income targets may be counterproductive, generating instability. This happens because the loss of exchange rate flexibility establishes a close link between inflation differences and real exchange rate dynamics. By controlling the internal objective, fiscal policy resists those real exchange rate swings that might be needed to avoid cumulative wealth imbalances. In contrast, mutually consistent foreign wealth targets may be beneficial. Copyright 1993 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Lossani, M & Tirelli, P, 1993. "Correcting Macroimbalances in a Monetary Union: An Evaluation of Alternative Fiscal Policy Rules," The Manchester School of Economic & Social Studies, University of Manchester, vol. 61(3), pages 248-269, September.
  • Handle: RePEc:bla:manch2:v:61:y:1993:i:3:p:248-69

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