The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility
This paper explores how decentralized, national fiscal policies interact with a common monetary policy in a monetary union. We show that fiscal policy plays a more important ro le in stabilizing country-specific shocks than with national monetary policies. Whereas monetary u nification with an optimally designed central bank reduces both expected inflation and the varia nce of inflation, it harms overall welfare by reducing output and public spending and increasing the variability of these variables. However, international transfers may avoid this decline in welf are.
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|Date of creation:||1995|
|Date of revision:|
|Publication status:||Published in Razin, A. and E. Sadka (eds.), The Economics of Globalization: Policy Perspectives from Public Economics, Cambridge University Press|
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