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Optimal monetary and fiscal policy in a currency union with nontradables

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  • Eiji Okano

Abstract

By constructing a dynamic stochastic general equilibrium (DSGE) model, this paper verifies the necessity for an optimal monetary and fiscal policy under a currency union with non-tradable goods. An optimal monetary policy alone can maximize social welfare through stabilizing the producer price inflation and output gap in each country simultaneously when all goods are tradable. However, a solitary optimal monetary policy cannot maximize social welfare because of the Balassa-Samuelson Theorem when non-tradable goods exist. In this case, a cooperative optimal monetary and fiscal policy maximizes social welfare. Also, self-oriented fiscal authority can replicate optimal allocation similar to a cooperative setting.

Suggested Citation

  • Eiji Okano, 2010. "Optimal monetary and fiscal policy in a currency union with nontradables," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 3(1), pages 1-23.
    • Handle: RePEc:taf:macfem:v:3:y:2010:i:1:p:1-23
    DOI: 10.1080/17520840903498081
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    References listed on IDEAS

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    1. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters, in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework, Princeton University Press.
    2. Nicoletta Batini & Richard Harrison & Stephen Millard, 2001. "Monetary policy rules for an open economy," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    3. Ferrero, Andrea, 2009. "Fiscal and monetary rules for a currency union," Journal of International Economics, Elsevier, vol. 77(1), pages 1-10, February.
    4. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11), pages 2059-2094.
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    Cited by:

    1. Thierry Betti, 2022. "Fiscal transfers in a two-level fiscal framework: stabilizing properties according to the fiscal instrument," Economics Bulletin, AccessEcon, vol. 42(2), pages 407-430.

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