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Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union

  • Barry Eichengreen


  • Fabio Ghironi


We develop a model of monetary and fiscal policies appropriate for considering U.S.-European policy interactions in an era of near-balanced budgets and European monetary union. We study the determinants of policy trade-offs and incentives for central banks and governments across the Atlantic. Smaller, more open economies face more favorable trade-offs, since openness enhances policy effectiveness via the exchange-rate channel. Changes in Europe's monetary arrangements do not affect U.S. trade-offs, although they alter the trade-offs facing European policy-makers. Fiscal trade-offs depend crucially on the extent to which fiscal policy is distortionary. Changes in taxes and spending move both employment and inflation in the desired direction following a worldwide supply shock when spending is financed with distortionary taxes. Copyright Kluwer Academic Publishers 2002

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Article provided by Springer in its journal Open Economies Review.

Volume (Year): 13 (2002)
Issue (Month): 4 (October)
Pages: 381-411

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Handle: RePEc:kap:openec:v:13:y:2002:i:4:p:381-411
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  8. Eichengreen, Barry & Ghironi, Fabio, 1997. "How Will Transatlantic Policy Interactions Change with the Advent of EMU?," CEPR Discussion Papers 1643, C.E.P.R. Discussion Papers.
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