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Monetary and Fiscal Policy Dynamics in an Asymmetric Monetary Union

  • Volker Clausen

    (University of Essen)

  • Hans-Werner Wohltmann

    (University of Kiel)

This paper investigates the dynamic effects of monetary and fiscal policy in a monetary union, which is characterized by asymmetric interest rate transmission. This asymmetry gives rise to intertemporal reversals in the relative effectiveness of policy on member country outputs. The direction and the number of these reversals depend on whether policies are unanticipated or anticipated. We also study the coordination between monetary and fiscal policy in a monetary union. Monetary policy may completely stabilize European output after unanticipated fiscal policy shocks. With anticipated fiscal policy shocks, complete stabilization throughout the overall adjustment process requires monetary policy to be time-inconsistent.

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File URL: http://128.118.178.162/eps/mac/papers/0201/0201001.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0201001.

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Date of creation: 09 Jan 2002
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Handle: RePEc:wpa:wuwpma:0201001
Note: Type of Document - ; figures: included
Contact details of provider: Web page: http://128.118.178.162

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  1. Clausen, Volker & Wohltmann, Hans-Werner, 2005. "Monetary and fiscal policy dynamics in an asymmetric monetary union," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 139-167, February.
  2. Volker Clausen, 1998. "Money demand and monetary policy in Europe," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 134(4), pages 712-740, December.
  3. Buiter, Willem H. & Miller, Marcus, 1982. "Real exchange rate overshooting and the output cost of bringing down inflation," European Economic Review, Elsevier, vol. 18(2), pages 85-123.
  4. Hans-Werner Wohltmann & Frank Bulthaupt, 1999. "Intertemporale Output- und Beschäftigungseffekte angebotsorientierter Politikmaßnahmen in einer Währungsunion," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 218(1+2), pages 1-22, January.
  5. Ramana Ramaswamy & Torsten Sløk, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 374-396, June.
  6. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  7. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  8. Willem H. Buiter, 1984. "Saddlepoint Problems in Contifuous Time Rational Expectations Models: A General Method and Some Macroeconomic Ehamples," NBER Technical Working Papers 0020, National Bureau of Economic Research, Inc.
  9. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
  10. Laufer, Nikolaus K. A. & Sundararajan, Srinivasa, 1994. "The international transmission of economic shocks in a three-country world under mixed exchange rates," Journal of International Money and Finance, Elsevier, vol. 13(4), pages 429-446, August.
  11. McCallum, B. T. & Whitaker, J. K., 1979. "The effectiveness of fiscal feedback rules and automatic stabilizers under rational expectations," Journal of Monetary Economics, Elsevier, vol. 5(2), pages 171-186, April.
  12. Läufer, Nikolaus K. A. & Sundararajan, Srinivasa, 1994. "The international transmission of economic shocks in a three-country world under mixed exchange rates," Discussion Papers, Series II 216, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
  13. Turnovsky, Stephen J, 1986. "Monetary and Fiscal Policy under Perfect Foresight: A Symmetric Two-country Analysis," Economica, London School of Economics and Political Science, vol. 53(210), pages 139-57, May.
  14. Stephen G. Cecchetti, 1999. "Legal Structure, Financial Structure, and the Monetary Policy Transmission Mechanism," NBER Working Papers 7151, National Bureau of Economic Research, Inc.
  15. Angeliki Kourelis & Carlo Cottarelli, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Working Papers 94/39, International Monetary Fund.
  16. Michael Ehrmann, 2000. "Comparing monetary policy transmission across European countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 136(1), pages 58-83, March.
  17. Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, June.
  18. Sander, Harald & Kleimeier, Stefanie, 2004. "Convergence in euro-zone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Journal of International Money and Finance, Elsevier, vol. 23(3), pages 461-492, April.
  19. Mojon, Benoît, 2000. "Financial structure and the interest rate channel of ECB monetary policy," Working Paper Series 0040, European Central Bank.
  20. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  21. Carlo Cottarelli & Angeliki Kourelis, 1994. "Financial Structure, Bank Lending Rates, and the Transmission Mechanism of Monetary Policy," IMF Staff Papers, Palgrave Macmillan, vol. 41(4), pages 587-623, December.
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