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The performance of simple fiscal policy rules in monetary union

Author

Listed:
  • Lukas Vogel
  • Werner Roeger
  • Bernhard Herz

Abstract

The paper analyses the stabilising potential of simple fiscal policy rules for a small open economy in monetary union in a 2-region DSGE model with nominal and real rigidities. We consider simple fiscal instrument rules for government purchases, transfers, and consumption, labour and capital taxes in analogy to interest rate rules in monetary policy. The paper finds a dichotomy in the welfare effects of fiscal policy for liquidity-constrained and intertemporal optimising households, i.e. policies enhancing the welfare of one group tend to reduce the welfare of the other one. Moderate average welfare gains from optimal policy contrast with large losses from non-optimal policy. Fiscal rules that respond to employment fluctuations may be preferred to rules responding to indicators of price competitiveness, because optimal policy in the former corresponds more closely to the idea of countercyclical stabilisation. The paper also emphasises the strong impact of the budgetary closure rule on the welfare effects of business cycle stabilisation.

Suggested Citation

  • Lukas Vogel & Werner Roeger & Bernhard Herz, 2012. "The performance of simple fiscal policy rules in monetary union," European Economy - Economic Papers 2008 - 2015 470, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    • Handle: RePEc:euf:ecopap:0470
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    Cited by:

    1. Barbara Annicchiarico & Fabio Dio & Francesco Felici, 2015. "Fiscal Devaluation Scenarios: A Quantitative Assessment for the Italian Economy," Open Economies Review, Springer, vol. 26(4), pages 731-785, September.
    2. Stefan Hohberger & Lukas Vogel & Bernhard Herz, 2015. "The sectoral reallocation of government purchases as budgetary-neutral stabilisation tool: a model-based analysis," International Economics and Economic Policy, Springer, vol. 12(1), pages 59-74, March.
    3. repec:bic:journl:v:23:y:2023:i:1:p:2173915 is not listed on IDEAS
    4. Landon, Stuart & Smith, Constance, 2017. "Does the design of a fiscal rule matter for welfare?," Economic Modelling, Elsevier, vol. 63(C), pages 226-237.
    5. Lena Kraus & Jürgen Beier & Bernhard Herz, 2019. "Sudden stops in a currency union – some lessons from the euro area," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 115-138, February.
    6. Hohberger, Stefan & Kraus, Lena, 2016. "Is fiscal devaluation welfare enhancing?," Economic Modelling, Elsevier, vol. 58(C), pages 512-522.
    7. Paulo Vieira & Celsa Machado & Ana Paula Ribeiro, 2016. "Optimal Fiscal Simple Rules for Small and Large Countries of a Monetary Union," EcoMod2016 9685, EcoMod.
    8. Patrik Kupkovič, 2017. "Dynamika inflácie v krajinách monetárnej únie: jej vplyv na spoločnú hospodársku politiku [Inflation Dynamics in Countries of the Monetary Union: What is its Impact on the Common Economic Policy?]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(1), pages 62-81.
    9. Hohberger, Stefan & Kraus, Lena, 2015. "Is fiscal devaluation welfare enhancing? A model-based analysis," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113193, Verein für Socialpolitik / German Economic Association.
    10. repec:hum:wpaper:sfb649dp2016-007 is not listed on IDEAS
    11. Brede, Maren, 2016. "Budget-neutral fiscal rules targeting inflation differentials," SFB 649 Discussion Papers 2016-007, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    12. 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.
    13. Stefan Hohberger & Lukas Vogel & Bernhard Herz, 2014. "Budgetary-Neutral Fiscal Policy Rules and External Adjustment," Open Economies Review, Springer, vol. 25(5), pages 909-936, November.
    14. Diagne, Youssoupha Sakrya, 2021. "Enjeux du projet de monnaie unique CEDEAO [Implications of the ECOWAS single currency project]," MPRA Paper 113995, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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