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Insulation Impossible: Monetary Policy and Regional Fiscal Spillovers in a Federation

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This paper studies the interactions of fiscal and monetary policies in the presence of fiscal spillovers within a monetary union. When capital markets are integrated, the fiscal policy of any member country will influence equilibrium wages and interest rates across the whole union. Thus there are fiscal spillovers within a federation. Within a general class of monetary policy rules, there does not exist one that completely insulates agents in one region from fiscal policy in another. We contrast particular rules, such as inflation and interest rate targeting, to illustrate how monetary policy becomes a channel for fiscal policy spillovers.

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  • Cooper, Russell & Kempf, Hubert & Peled, Dan, "undated". "Insulation Impossible: Monetary Policy and Regional Fiscal Spillovers in a Federation," Working Papers WP2010/5, University of Haifa, Department of Economics.
  • Handle: RePEc:haf:huedwp:wp201005
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    1. Askenazy, P. & Breda, T. & Irac, D., 2010. "Innovation and Advertising: Theory and Evidence," Working papers 284, Banque de France.
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    Keywords

    Fiscal spillovers; Monetary union;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • F15 - International Economics - - Trade - - - Economic Integration

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