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Monetary and Fiscal Policy Efficiency and Coordination in an Open-Economy General Equilibrium Model with Three Production Sectors

  • Gilbert Koenig
  • Irem Zeyneloglu

The paper analyzes monetary and fiscal policy efficiency and coordination in a stochastic new open economy macroeconomics (NOEM) model with three production sectors. Some or all of these sectors can be affected by unanticipated productivity shocks which can trigger monetary and fiscal policy reactions. The uncertainty over the shocks can be symmetric or asymmetric across the two countries. The paper first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative effects of unanticipated productivity shocks. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on monetary policy efficiency. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible-price equilibrium. However, their efficiency is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks. In case of high asymmetry, monetary cooperation can be counter-productive either for the home or for the foreign country.

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Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2008-05.

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Date of creation: 2008
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Handle: RePEc:ulp:sbbeta:2008-05
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  1. Obstfeld, Maurice & Rogoff, Kenneth, 2001. "Global Implications of Self-Orientated National Monetary Rules," CEPR Discussion Papers 2856, C.E.P.R. Discussion Papers.
  2. Matthew B. Canzoneri & Robert E. Cumby & Behzad T. Diba, 2002. "The Need for International Policy Coordination: What's Old, What's New, What's Yet to Come?," NBER Working Papers 8765, National Bureau of Economic Research, Inc.
  3. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  4. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 421-445, May.
  5. Matthew B. Canzoneri & Dale W. Henderson, 1991. "Monetary Policy in Interdependent Economies: A Game-Theoretic Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031787, June.
  6. Lombardo, Giovanni & Sutherland, Alan, 2003. "Monetary and fiscal interactions in open economies," Working Paper Series 0289, European Central Bank.
  7. Trionfetti, Federico, 2001. "Public Procurement, Market Integration, and Income Inequalities," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 29-41, February.
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