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Title: Fiscal Policy and Macroeconomic Stability Within a Currency Union

Author(s): Tatiana Kirsanova, David Vines and Simon Wren-Lewis

Publication Date: March 2006

Keyword(s): macroeconomic stability, monetary and fiscal policies and monetary union

Programme Area(s): International Macroeconomics

Abstract: We analyse the stability of countries within a monetary union in the face of asymmetric shocks, using a simple but widely applicable model. We show that members of the union may be subject to severe, and possibly unstable, cycles following asymmetric shocks if there is a significant backward looking element in inflation behaviour, and if real interest rates influence the level of aggregate demand. This cyclical instability can be mitigated if fiscal policy in each member country reacts to inflation differences, but it can be aggravated if fiscal feedback on debt is too strong.

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Bibliographic Reference

Kirsanova, T, Vines, D and Wren-Lewis, S. 2006. 'Fiscal Policy and Macroeconomic Stability Within a Currency Union'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5584