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Optimal Fiscal Policy Rules in a Monetary Union

  • 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)

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.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0611.pdf
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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0611.

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Date of creation: 2006
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Handle: RePEc:exe:wpaper:0611
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