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Optimal Fiscal Policy Rules in a Monetary Union

  • Tatiana Kirsanova

    (University of Exeter)

  • David Vines

    (Baliol College, University of Oxford)

  • Mathan Satchi

    (University of Kent)

  • Simon Wren-Lewis

    (University of Exeter)

This paper investigates the importance of fiscal policy in providing macroeconomic stabilization in a monetary union. We use a microfounded New Keynesian model of a monetary union, which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation, output, and the terms of trade, but that not much is lost if national fiscal policy is restricted to react, on the one hand, to "national differences" in inflation and, on the other hand, to either national differences in output or changes in the terms of trade. However, welfare is reduced if national fiscal policy responds only to output, ignoring inflation. Copyright 2007 The Ohio State University.

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 40.

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Date of creation: 03 Sep 2005
Date of revision:
Handle: RePEc:mmf:mmfc05:40
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