Fiscal and Macroprudential Policies in a Monetary Union

In the European Monetary Union (EMU), monetary policy is decided by the European Central Bank (ECB). This can create some imbalances that can potentially be corrected by national policies. So far, Öscal policy was the natural candidate to adjust those imbalances. Nevertheless, after the global Önancial crisis (GFC), a new policy candidate has emerged, namely national macroprudential policies, with the mission of reducing Önancial risks. This issue gives rise to an interesting research question: how do macroprudential and Öscal policies interact? By a§ecting real interest rates and the level of activity, a discretionary macroprudential policy alters the evolution of public debt and can impose a Öscal cost when the government is forced to increase tax rates to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock creates substantial crossborder Önancial e§ects and also ináuences the foreign country Öscal stance. Moreover, a discretionary government spending policy a§ects housing prices, so the strenght with which macroprudential policy reacts to a change in the price of houses has an impact on the Öscal multiplier.