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Taylor rule in a policy-mix analysis for open heterogeneous monetary unions

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  • Cristina BADARAU
  • Andreea CURMEI-SEMENESCU

Abstract

The paper studies, at a purely theoretical level, the monetary-fiscal policy-mix in an open currency union with asymmetric monetary transmission, where the central bank follows an interest rate Taylor rule. It shows that under the optimal monetary policy regime, the fiscal policy can stimulate the output without any impact on inflation. However, if the monetary rule deviates from the optimum, a stabilization bias appears. It can be reduced by a tighter monetary policy, but the heterogeneous monetary transmission produces asymmetric national reactions to shocks. For asymmetric fiscal shocks, output divergences can increase permanently and only a union-wide fiscal strategy accounting for national structural asymmetries can avoid them..

Suggested Citation

  • Cristina BADARAU & Andreea CURMEI-SEMENESCU, 2017. "Taylor rule in a policy-mix analysis for open heterogeneous monetary unions," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 9(2), pages 063-081, December.
  • Handle: RePEc:rfb:journl:v:09:y:2017:i:2:p:063-081
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