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The macroeconomic policy mix in a monetary union with flexible inflation targeting

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  • Andersen, Torben M.

Abstract

Policy mix problems may arise in a monetary union with centralized monetary policy and decentralized fiscal policy. A consequence of this may be an inappropriate stabilization of shocks. This paper addresses how policy coordination problems between fiscal authorities depend on the type of shocks and the objectives of the monetary authority. It is shown that non-coordinated fiscal policies tend to be too counter-cyclical in the case of aggregate shocks, and that this bias can be reduced by lowering the weight to output stability in monetary policy. Oppositely, for country-specific shocks non-coordinated fiscal policies tend to be too pro-cyclical, and this bias can be reduced by increasing the weight to output stability in monetary policy. Considering the assignment of policy tasks - within the set of binding policy rules for fiscal and monetary policies - it is found that flexible inflation targeting dominates strict inflation targeting.

Suggested Citation

  • Andersen, Torben M., 2008. "The macroeconomic policy mix in a monetary union with flexible inflation targeting," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 411-437, April.
  • Handle: RePEc:eee:jimfin:v:27:y:2008:i:3:p:411-437
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    Cited by:

    1. Foresti, Pasquale, 2017. "Monetary and fiscal policies in interaction in monetary unions," LSE Research Online Documents on Economics 69623, London School of Economics and Political Science, LSE Library.
    2. Hyuk Rhee & Nurlan Turdaliev, 2012. "Targeting Rules for an Open Economy," Open Economies Review, Springer, vol. 23(3), pages 447-471, July.
    3. Chortareas, Georgios & Mavrodimitrakis, Christos, 2016. "Can monetary policy fully stabilize pure demand shocks in a monetary union with a fiscal leader?," Economic Modelling, Elsevier, vol. 54(C), pages 463-468.
    4. Chortareas, Georgios & Mavrodimitrakis, Christos, 2017. "Strategic fiscal policies and leadership in a monetary union," European Journal of Political Economy, Elsevier, vol. 47(C), pages 133-147.

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