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Optimal fiscal policy in a monetary union

Author

Listed:
  • Jordi Gali
  • Tommaso Monacelli

Abstract

We lay out an optimizing multicountry framework suitable for fiscal policy analysis in a monetary union. We show that, for any given member country, the relinquishment of monetary policy independence, coupled with nominal price rigidity, generates a motive for fiscal stabilization beyond the optimal provision of public goods. This incentive depends on the degree of symmetry between that country’s and the union average natural rate of interest. Interestingly, this is shown to be the case despite fiscal policy being set, in each individual country, in order to maximize welfare at the level of the union as a whole.

Suggested Citation

  • Jordi Gali & Tommaso Monacelli, 2005. "Optimal fiscal policy in a monetary union," Proceedings, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpr:y:2005
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Paolo Epifani & Gino Gancia, 2005. "On Globalization and the Growth of Governments," Working Papers 267, Barcelona Graduate School of Economics.
    2. Cambell Leith & Simon Wren-Lewis, 2006. " The Optimal Monetary Policy Response to Exchange Rate Misalignments," CDMA Conference Paper Series 0605, Centre for Dynamic Macroeconomic Analysis.
    3. Paolo Epifani & Gino Gancia, 2009. "Openness, Government Size and the Terms of Trade," Review of Economic Studies, Oxford University Press, vol. 76(2), pages 629-668.
    4. Campbell Leith & Simon Wren-Lewis, 2006. "The Costs of Fiscal Inflexibility - Extended," Working Papers 2005_23, Business School - Economics, University of Glasgow.
    5. Kamal, Mona, 2010. "تجربة الاتحاد النقدي الأوروبي في مجال التنسيق بين السياستين المالية والنقدية
      [The Experience of the European Monetary Union in the Coordination of Monetary and Fiscal Policies]
      ," MPRA Paper 27764, University Library of Munich, Germany.
    6. V. Anton Muscatelli & Patrizio Tirelli, 2005. "Analyzing the Interaction of Monetary and Fiscal Policy: Does Fiscal Policy Play a Valuable Role in Stabilisation?," CESifo Economic Studies, CESifo, vol. 51(4), pages 549-585.
    7. Orjasniemi, Seppo, 2014. "Optimal fiscal policy of a monetary union member," Research Discussion Papers 13/2014, Bank of Finland.
    8. Pappa, Evi & Vassilatos, Vanghelis, 2007. "The unbearable tightness of being in a monetary union: Fiscal restrictions and regional stability," European Economic Review, Elsevier, vol. 51(6), pages 1492-1513, August.
    9. Canale, Rosaria Rita & Napolitano, Oreste, 2009. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 20207, University Library of Munich, Germany.

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    Keywords

    Fiscal policy ; Monetary policy;

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