IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0611.

in new window

Date of creation: 2006
Date of revision:
Handle: RePEc:exe:wpaper:0611
Contact details of provider: Postal: Streatham Court, Rennes Drive, Exeter EX4 4PU
Phone: (01392) 263218
Fax: (01392) 263242
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Giovanni Ganelli, 2002. "The New Open Economy Macroeconomics of Government Debt," Trinity Economics Papers 200214, Trinity College Dublin, Department of Economics.
  2. Stephanie Schmitt-Grohé & Martín Uribe, 2007. "Optimal simple and implementable monetary and fiscal rules," FRB Atlanta Working Paper 2007-24, Federal Reserve Bank of Atlanta.
  3. Pierpaolo Benigno & David López-Salido, 2002. "Inflation persistence and optimal monetary policy in the euro area," International Finance Discussion Papers 749, Board of Governors of the Federal Reserve System (U.S.).
  4. Leith, Campbell & Simon Wren-Lewis, 2002. "Compatibility Between Monetary and Fiscal Policy Under EMU," Royal Economic Society Annual Conference 2002 124, Royal Economic Society.
  5. Benigno, Pierpaolo & Woodford, Michael, 2004. "Optimal monetary and fiscal policy: a linear-quadratic approach," Working Paper Series 0345, European Central Bank.
  6. Steinsson, Jon, 2003. "Optimal monetary policy in an economy with inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1425-1456, October.
  7. Sutherland, Alan, 2002. "A Simple Second-Order Solution Method For Dynamic General Equilibrium Models," CEPR Discussion Papers 3554, C.E.P.R. Discussion Papers.
  8. Jordi Galí & Tommaso Monacelli, 2003. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Working Papers 11, Barcelona Graduate School of Economics.
  9. Frank Smets & Raf Wouters, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Working Paper Research 19, National Bank of Belgium.
  10. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers 200105, Rutgers University, Department of Economics.
  11. Lombardo, Giovanni & Sutherland, Alan, 2003. "Monetary and fiscal interactions in open economies," Working Paper Series 0289, European Central Bank.
  12. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  13. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  14. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
  15. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," NBER Working Papers 7884, National Bureau of Economic Research, Inc.
  16. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
  17. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  18. Bean, Charles & Larsen, Jens D. J. & Nikolov, Kalin, 2002. "Financial frictions and the monetary transmission mechanism: theory, evidence and policy implications," Working Paper Series 0113, European Central Bank.
  19. Lane, Philip R., 2001. "The new open economy macroeconomics: a survey," Journal of International Economics, Elsevier, vol. 54(2), pages 235-266, August.
  20. Jensen, Christian & McCallum, Bennett T., 2002. "The non-optimality of proposed monetary policy rules under timeless perspective commitment," Economics Letters, Elsevier, vol. 77(2), pages 163-168, October.
  21. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 0166, European Central Bank.
  22. Currie, David & Levine, Paul, 1985. "Simple Macropolicy Rules for the Open Economy," Economic Journal, Royal Economic Society, vol. 95(380a), pages 60-70, Supplemen.
  23. Beetsma, Roel M. W. J. & Jensen, Henrik, 2004. "Mark-up fluctuations and fiscal policy stabilization in a monetary union," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 357-376, June.
  24. Hughes Hallett, Andrew & Vines, David, 1991. "Adjustment Difficulties within a European Monetary Union: Can They be Reduced?," CEPR Discussion Papers 517, C.E.P.R. Discussion Papers.
  25. Benigno, Gianluca & Benigno, Pierpaolo, 2001. "Monetary Policy Rules and the Exchange Rate," CEPR Discussion Papers 2807, C.E.P.R. Discussion Papers.
  26. Kirsanova, Tatiana & Vines, David & Wren-Lewis, Simon, 2006. "Fiscal Policy and Macroeconomic Stability Within a Currency Union," CEPR Discussion Papers 5584, C.E.P.R. Discussion Papers.
  27. Yash P. Mehra, 2004. "The output gap, expected future inflation and inflation dynamics: another look," Working Paper 04-06, Federal Reserve Bank of Richmond.
  28. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  29. Titiana Kirsanova & David Vines & Mathan Satchi & Simon Wren-Lewis, 2005. "Inflation Persistence, Fiscal Constraints and Non-cooperative Authorities Stabilization Policy in a Monetary Union," Money Macro and Finance (MMF) Research Group Conference 2005 17, Money Macro and Finance Research Group.
  30. Tatiana Kirsonova & Campbell Leith & Simon Wren-Lewis, 2004. "Should the Exchange Rate be in the Monetary Policy Objective Function?," Working Papers 2004_7, Business School - Economics, University of Glasgow.
  31. Duarte, Margarida & Wolman, Alexander L., 2002. "Regional inflation in a currency union: fiscal policy vs. fundamentals," Working Paper Series 0180, European Central Bank.
  32. Mehra Yash P, 2004. "The Output Gap, Expected Future Inflation and Inflation Dynamics: Another Look," The B.E. Journal of Macroeconomics, De Gruyter, vol. 4(1), pages 1-19, December.
  33. Driver, Rebecca L & Wren-Lewis, Simon, 1999. "European Monetary Union and Asymmetric Shocks in a New Keynesian Model," Oxford Economic Papers, Oxford University Press, vol. 51(4), pages 665-88, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:exe:wpaper:0611. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Carlos Cortinhas)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.