How Do Monetary and Fiscal Policy Interact in the European Monetary Union? / Matthew B. Canzoneri, Robert E. Cumby, Behzad T. Diba.

Format:

Book

Author/Creator:

Canzoneri, Matthew B.

Contributor:

National Bureau of Economic Research.

Cumby, Robert E.

Diba, Behzad T.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11055.

NBER working paper series no. w11055

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model's variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).

Notes:

Print version record

January 2005.