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Monetary Union: Fiscal Stabilisation In The Face Of Asymmetric Shocks

  • Mathan Satchi
  • Tatiana Kirsanova
  • David Vines

This Paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2004 with number 153.

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Date of creation: 17 Sep 2004
Date of revision:
Handle: RePEc:ecj:ac2004:153
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  1. Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal monetary and fiscal policy: a linear-quadratic approach," Working Paper Series 0345, European Central Bank.
  2. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and Fiscal Policy Interactions in a Micro-Funded Model of a Monetary Union," CEPR Discussion Papers 3591, C.E.P.R. Discussion Papers.
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