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Optimal Fiscal Policy Rules in a Monetary Union

Author

Listed:
  • Tatiana Kirsanova

    (Department of Economics, University of Exeter)

  • Mathan Satchi

    (University of Kent)

  • David Vines

    (Economics Department and Balliol College, University of Oxford, Australian National University and CEPR)

  • Simon Wren-Lewis

    (Department of Economics, University of Exeter)

Abstract

This paper investigates the importance of ?scal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in in?ation and non-Ricardian consumers, and derive optimal simple rules for ?scal authorities. We ?nd that ?scal policy can play an important role in reacting to in?ation, output and the terms of trade, but that not much is lost if national ?scal policy is restricted to react, on the one hand, to national di?erences in in?ation and, on the other hand, to either national di?erences in output or changes in the terms of trade. However, welfare is reduced if national ?scal policy responds only to output, ignoring in?ation.

Suggested Citation

  • Tatiana Kirsanova & Mathan Satchi & David Vines & Simon Wren-Lewis, 2006. "Optimal Fiscal Policy Rules in a Monetary Union," Discussion Papers 0611, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0611
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0611.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal monetary and fiscal policies; Monetary union; Simple rules;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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