DP12371 Macroeconomic Stabilization, Monetary-Fiscal Interactions, and Europe's Monetary Union

Author(s): Giancarlo Corsetti, Luca Dedola, Marek Jarocinski, Bartosz Adam Mackowiak, Sebastian Schmidt
Publication Date: October 2017
Keyword(s): eurobond, Government bonds, Joint Analysis of Fiscal and Monetary Policy, Lower Bound on Nominal Interest Rates, Self-Fulfilling Sovereign Default
JEL(s): E31, E62, E63
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12371

The euro area recently experienced a prolonged period of weak economic activity and very low inflation. This paper reviews models of business cycle stabilization with an eye to formulating lessons for policy in the euro area. According to standard models, after a large recessionary shock accommodative monetary and fiscal policy together may be necessary to stabilize economic activity and inflation. The paper describes practical ways for the euro area to be able to implement an effective monetary-fiscal policy mix.