DP340 Fiscal Aspects of Monetary Integration in Europe

Author(s): Frederick van der Ploeg
Publication Date: August 1989
Keyword(s): Exchange Rates, Fiscal Policy, Monetary Integration, Policy Coordination
JEL(s): 321, 411, 431, 432
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=340

An adverse supply shock hits a two-country Mundell-Fleming world and causes unemployment and a higher cost of living. The optimal fiscal policies under noncooperative and under international policy coordination are then contrasted under three alternative regimes: floating exchange rates with hegemony (such as the EMS), and fixed exchange rates with symmetry (such as the EMU). The welfare loss depends on unemployment, real income and budgetary imbalance. There is also an examination of the effects of economic integration ("1992"), of indexation of wages to the cost of living, and of interactions between Europe and the US. The results shed some light on the recent proposals of the Delors Committee for economic and monetary union in Europe.