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Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint

  • Stefanie Flotho

    ()

    (Institute for Economic Research Chair of Economic Theory, University of Freiburg)

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    This paper explicitly models strategic interaction between two independent national fiscal authorities and a single central bank in a simple New Keynesian model of a monetary union. Monetary policy is constrained by the zero lower bound on nominal interest rates. Coordination of fiscal policies does not always lead to the best welfare effects. It depends on the nature of the shocks whether governments prefer to coordinate or not coordinate. The size of the government multipliers depend on the combination of the intraunion competitiveness parameters. They get larger in case of implementation lags of fiscal policy.

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    File URL: http://www.vwl.uni-freiburg.de/iwipol/REPEC/fre/wpaper/DP20_Flotho_Monetary_and_Fiscal_Policy_in_a_Monetary_Union_under_the_Zero_Lower_Bound_constraint.pdf
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    Paper provided by Department of International Economic Policy, University of Freiburg in its series Discussion Paper Series with number 20.

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    Length: 38 pages
    Date of creation: Jun 2012
    Date of revision: Jun 2012
    Handle: RePEc:fre:wpaper:20
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    1. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
    2. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series 2534, CESifo Group Munich.
    3. Ippei Fujiwara & Tomoyuki Nakajima & Nao Sudo & Yuki Teranishi, 2011. "Global Liquidity Trap," KIER Working Papers 780, Kyoto University, Institute of Economic Research.
    4. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
    5. Troy Davig & Eric M. Leeper, 2009. "Monetary-fiscal policy interactions and fiscal stimulus," Research Working Paper RWP 09-12, Federal Reserve Bank of Kansas City.
    6. Cook, David & Devereux, Michael B., 2011. "Optimal fiscal policy in a world liquidity trap," European Economic Review, Elsevier, vol. 55(4), pages 443-462, May.
    7. Julio Carrillo & Celine Poilly, 2013. "Online Appendix to "How do financial frictions affect the spending multiplier during a liquidity trap?"," Technical Appendices 12-54, Review of Economic Dynamics.
    8. Sandra Gomes & P. Jacquinot & Ricardo Mestre & João Sousa, 2010. "Global policy at the Zero Lower Bound in a large-scale DSGE model," Working Papers w201018, Banco de Portugal, Economics and Research Department.
    9. Carrillo Julio A. & Poilly Céline, 2010. "Investigating the Zero Lower Bound on the Nominal Interest Rate under Financial Instability," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    10. Bas van Aarle & Harry Garretsen & Florence Huart, 2004. "Monetary and Fiscal Policy Rules in the EMU," German Economic Review, Verein für Socialpolitik, vol. 5(4), pages 407-434, November.
    11. Lukas Vogel & Werner Roeger & Bernhard Herz, 2006. "Optimal Simple Rules for Fiscal Policy in a Monetary Union," Working Papers 021, Bavarian Graduate Program in Economics (BGPE).
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