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Monetary and Fiscal Policy Coordination

Author

Listed:
  • René Cabral-Torres

Abstract

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.

Suggested Citation

  • René Cabral-Torres, "undated". "Monetary and Fiscal Policy Coordination," Discussion Papers 05/28, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:05/28
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Common central bank; policy co-ordination; monetary union; monetary leadership; fiscal leadership;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F15 - International Economics - - Trade - - - Economic Integration

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