IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Monetary and Fiscal Policy Coordination

  • René Cabral-Torres

Motivated by the accession of new member states into the European Union, this paper examines the appeal of taking part in a large monetary union from the perspective of small open economies. Consistent with existing findings in the literature, we show that in the absence of fiscal policy considerations, taking part in a large monetary union is counterproductive for a small economy. Nevertheless, once the role of fiscal policy is properly incorporated, taking part in the monetary union becomes desirable from a social perspective. Following these results, we explore the prospects of engaging both economies in fiscal coordination and on how different schemes of policy synchronization can provide the grounds to make cooperation beneficial for the members of a monetary union. We find that when monetary and fiscal authorities cooperate and attempt to exploit externalities for their own benefit, a Pareto efficient outcome can be achieved if fiscal policy in the monetary union is coordinated by a central authority and such authority acts as a Stackelberg leader vis-à-vis the central bank. Our analysis suggests that this regime result superior to (i) a monetary union in which fiscal authorities conduct their policy in an independent or (ii) coordinated fashion, (iii) to a regime where both authorities internalize the effects of their own externalities by allowing the central bank to act as Stackelberg leader and (iv) event to a regime in which the small open economy decides to stay out of the monetary union.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.york.ac.uk/media/economics/documents/discussionpapers/2005/0528.pdf
File Function: Main text
Download Restriction: no

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 05/28.

as
in new window

Length:
Date of creation:
Date of revision:
Handle: RePEc:yor:yorken:05/28
Contact details of provider: Postal:
Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom

Phone: (0)1904 323776
Web page: http://www.york.ac.uk/economics/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Andrés, Javier & Doménech, Rafael & Fatás, Antonio, 2004. "The Stabilizing Role of Government Size," CEPR Discussion Papers 4384, C.E.P.R. Discussion Papers.
  2. Lane, Philip R, 2000. " Asymmetric Shocks and Monetary Policy in a Currency Union," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 585-604, December.
  3. Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell : Fiscal policy in a monetary union," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00266420, HAL.
  4. Martin, Philippe, 1995. "Free-riding, convergence and two-speed monetary unification in Europe," European Economic Review, Elsevier, vol. 39(7), pages 1345-1364, August.
  5. van Aarle, B. & Engwerda, J.C. & Plasmans, J.E.J., 2002. "Monetary and fiscal policy interaction in the EMU : A dynamic game approach," Other publications TiSEM 2a6eddfa-a4f2-4cc9-a352-b, Tilburg University, School of Economics and Management.
  6. Barry Eichengreen & Fabio Ghironi, 2002. "Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union," Open Economies Review, Springer, vol. 13(4), pages 381-411, October.
  7. Giavazzi, Francesco & Giovannini, Alberto, 1986. "Monetary Policy Interactions under Managed Exchange Rates," CEPR Discussion Papers 123, C.E.P.R. Discussion Papers.
  8. Volker Clausen & Hans-Werner Wohltmann, 2002. "Monetary and Fiscal Policy Dynamics in an Asymmetric Monetary Union," Macroeconomics 0201001, EconWPA.
  9. Michael T. Kiley, 2004. "Is moderate-to-high inflation inherently unstable?," Finance and Economics Discussion Series 2004-43, Board of Governors of the Federal Reserve System (U.S.).
  10. 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, March.
  11. Lane, Philip R., 1996. "Stabilization policy in a currency union," Economics Letters, Elsevier, vol. 53(1), pages 53-60, October.
  12. Giavazzi, Francesco & Pagano, Marco, 1986. "The Advantages of Tying One's Hands: EMS Discipline and Central Bank Credibility," CEPR Discussion Papers 135, C.E.P.R. Discussion Papers.
  13. Beetsma, Roel & Debrun, Xavier & Klaassen, Franc, 2001. "Is Fiscal Policy Coordination in EMU Desirable?," CEPR Discussion Papers 3035, C.E.P.R. Discussion Papers.
  14. Ghironi, Fabio & Giavazzi, Francesco, 1998. "Currency areas, international monetary regimes, and the employment-inflation tradeoff," Journal of International Economics, Elsevier, vol. 45(2), pages 259-296, August.
  15. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
  16. Levine, Paul L & Pearlman, Joseph, 1998. "Monetary Union: The Ins and Outs of Strategic Delegation," CEPR Discussion Papers 1800, C.E.P.R. Discussion Papers.
  17. Markus Knell & Helmut Stix, 2003. "How Robust are Money Demand Estimations? A Meta-Analytic Approach," Working Papers 81, Oesterreichische Nationalbank (Austrian Central Bank).
  18. Dixit, Avinash & Lambertini, Luisa, 2003. "Symbiosis of monetary and fiscal policies in a monetary union," Journal of International Economics, Elsevier, vol. 60(2), pages 235-247, August.
  19. Lodovico Pizzati, 2000. "Monetary Policy Coordination and the Level of National Debt," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 27(4), pages 389-409, December.
  20. Rantala, Anssi, 2001. "Does monetary union reduce employment?," Research Discussion Papers 7/2001, Bank of Finland.
  21. L. Lambertini & R. Rovelli, 2003. "Monetary and fiscal policy coordination and macroeconomic stabilization. A theoretical analysis," Working Papers 464, Dipartimento Scienze Economiche, Universita' di Bologna.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:yor:yorken:05/28. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paul Hodgson)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.