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Optimal monetary and fiscal policy in a currency union

  • Gali­, Jordi
  • Monacelli, Tommaso

We lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union. The monetary authority sets a common interest rate for the union, whereas fiscal policy is implemented at the country level, through the choice of government spending. In the presence of country-specific shocks and nominal rigidities, the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank, whereas fiscal policy has a country-specific stabilization role, one beyond the efficient provision of public goods.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 76 (2008)
Issue (Month): 1 (September)
Pages: 116-132

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Handle: RePEc:eee:inecon:v:76:y:2008:i:1:p:116-132
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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