Research Discussion Papers, Bank of Finland
Optimal fiscal policy of a monetary union member
Abstract: In this essay we study the optimal non-coordinated fiscal
policy in a monetary union, where a common and independent monetary
authority commits to optimally set the union-wide nominal interest rate.
The national governments in the monetary union implement independent fiscal
policies by choosing the level of government expenditures. We show that
under a non-coordinated optimal fiscal policy rule government spending
should react counter cyclically to the local output gap and inflation,
while the union-wide aggregate fluctuations are stabilized by the common
monetary policy. We also show that the spillovers caused by asymmetric
shocks depend on the relative size of the country subject to these
Keywords: monetary union; monetary policy; fiscal policy; (follow links to similar papers)
JEL-Codes: E52; E62; F41; (follow links to similar papers)
24 pages, June 10, 2014
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