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On the Logic of Fiscal Policy Coordination in a Monetary Union

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  • Oliver Landmann

    () (Universität Freiburg)

Abstract

Abstract Fiscal policies have been widely criticized for their failure to act as a stabilizing countercyclical force in the European Monetary Union (EMU) prior to the Financial Crisis of 2008, and even more so thereafter. Motivated by EMU experience, this paper lays out a parsimonious model of fiscal-monetary policy interaction between national fiscal authorities and a common central bank. It is well known that the structure of this interaction changes fundamentally when the central bank is constrained by a binding zero lower bound on the interest rate. This paper demonstrates that decentralized fiscal policies suffer from a systematic procyclical bias in a monetary union, both when the zero lower bound bites and when it does not. Whereas the existing literature on fiscal policy coordination knows “locomotive games” and “discipline games”, in which fiscal policies are too tight or too loose, respectively, the analysis in this paper identifies a more general “stabilization game” in which coordination can play a useful role by strengthening the countercyclical thrust of fiscal policies.

Suggested Citation

  • Oliver Landmann, 2018. "On the Logic of Fiscal Policy Coordination in a Monetary Union," Open Economies Review, Springer, vol. 29(1), pages 69-87, February.
  • Handle: RePEc:kap:openec:v:29:y:2018:i:1:d:10.1007_s11079-017-9446-z
    DOI: 10.1007/s11079-017-9446-z
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    References listed on IDEAS

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    Cited by:

    1. Carsten Hefeker & Michael Neugart, 2019. "Policy Coordination under Model Disagreement and Uncertainty," CESifo Working Paper Series 7477, CESifo Group Munich.
    2. Carsten Hefeker & Michael Neugart, 2019. "Policy Coordination Under Model Disagreement and Uncertainty," Open Economies Review, Springer, vol. 30(4), pages 719-737, September.
    3. Loewald, Christopher & Wörgötter, Andreas, 2019. "Do monetary unions dream of structural reforms?," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 01/2019, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).

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