English, Article, Journal or magazine article edition: Optimal Monetary and Fiscal Policy in a Currency Union Jordi Gali; Jordi Galí; Tommaso Monacelli

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Optimal Monetary and Fiscal Policy in a Currency Union
Author
  • Jordi Gali
  • Jordi Galí
  • Tommaso Monacelli
Physical Description
  • preprint
Notes
  • RePEc:nbr:nberwo:11815
  • We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyze its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending level. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal monetary policy requires that inflation be stabilized at the union level. On the other hand, the relinquishment of an independent monetary policy, coupled with nominal price rigidities, generates a stabilization role for fiscal policy, one beyond the efficient provision of public goods. Interestingly, the stabilizing role for fiscal policy is shown to be desirable not only from the viewpoint of each individual country, but also from that of the union as a whole. In addition, our paper offers some insights on two aspects of policy design in currency unions: (i) the conditions for equilibrium determinacy and (ii) the effects of exogenous government spending variations.
  • RePEc:igi:igierp:300
  • We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and study its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal cooperative policy arrangement requires that inflation be stabilized at the union level by the common central bank, while fiscal policy is used by each country for stabilization purposes. By contrast, when the fiscal authorities act in a non-coordinated way, their joint actions lead to a suboptimal outcome, and make the common central bank face a trade-off between inflation and output gap stabilization at the union level.
  • Monetary union, sticky prices, countercyclical policy, inflation differentials
  • RePEc:upf:upfgen:909
Language
  • English
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