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Monetary Union: Fiscal Stabilisation in the Face of Asymmetric Shocks

  • Tatiana Kirsanova

    (University of Exeter)

  • Mathan Satchi

    (University of Oxford)

  • David Vines

    (Balliol College, University of Oxford)

This Paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2004 with number 86.

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Date of creation: 17 Sep 2004
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Handle: RePEc:mmf:mmfc04:86
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