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Insulation impossible: fiscal spillovers in a monetary union

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  • Russell W. Cooper
  • Hubert Kempf
  • Dan Peled

Abstract

This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be influenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.

Suggested Citation

  • Russell W. Cooper & Hubert Kempf & Dan Peled, 2009. "Insulation impossible: fiscal spillovers in a monetary union," Globalization Institute Working Papers 30, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:30
    Note: Published as: Cooper, Russell, Hubert Kempf and Dan Peled (2014), "Insulation Impossible: Monetary Policy and Regional Debt Spillovers in a Federal," Journal of the European Economic Association 12 (2): 465-491.
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    References listed on IDEAS

    as
    1. Cooper, Russell & Kempf, Hubert & Peled, Dan, 2010. "Regional debt in monetary unions: Is it inflationary?," European Economic Review, Elsevier, vol. 54(3), pages 345-358, April.
    2. Carlstrom, Charles T. & Fuerst, Timothy S., 1995. "Interest rate rules vs. money growth rules a welfare comparison in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 247-267, November.
    3. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-646, June.
    4. Kehoe, Patrick J., 1987. "Coordination of fiscal policies in a world economy," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 349-376, May.
    5. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is it is or is it ain't your obligation? Regional debt in a fiscal federation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00310512, HAL.
    6. Scott Freeman & Joseph H. Haslag, 1996. "On the optimality of interest-bearing reserves in economies of overlapping generations (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(3), pages 557-565.
    7. Smith, Bruce D, 1994. "Efficiency and Determinacy of Equilibrium under Inflation Targeting," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 327-344.
    8. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Is It Is Or Is It Ain'T My Obligation? Regional Debt In A Fiscal Federation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(4), pages 1469-1504, November.
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    Cited by:

    1. Konon, Alexander, 2012. "Direct and Indirect Crisis Effects on International Trade or: Is There a Chance to Employ an Income Stimulus to Stimulate Exports?," MPRA Paper 36363, University Library of Munich, Germany.
    2. Xu, Kun & Guan, Zhihua & Xu, Wenli, 2015. "省级财政支出效率空间溢出效应研究：基于超效率dea和gsm模型 [Study on Spatial Spillover Effect of Provincial Fiscal Efficiency: Based on Super-Efficient DEA and GSM Model]," MPRA Paper 71132, University Library of Munich, Germany.
    3. Mark Aguiar & Manuel Amador & Emmanuel Farhi & Gita Gopinath, 2015. "Coordination and Crisis in Monetary Unions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(4), pages 1727-1779.
    4. Hubert Kempf, 2021. "Fiscal Federalism in a Monetary Union: The No-Cooperation Pitfall," Open Economies Review, Springer, vol. 32(1), pages 109-151, February.
    5. Pasquale Foresti, 2018. "Monetary And Fiscal Policies Interaction In Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 32(1), pages 226-248, February.
    6. Fabrizio Carmignani, 2013. "Does the Long Arm of US Macroeconomic Policy Reach South Asia?," South Asian Journal of Macroeconomics and Public Finance, , vol. 2(2), pages 145-168, December.
    7. Carmignani, Fabrizio, 2015. "The international effect of US government expenditure," Economic Modelling, Elsevier, vol. 47(C), pages 63-73.

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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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