DP4433 Monetary Union: Fiscal Stabilization In The Face of Asymmetric Shocks

Author(s):	Tatiana Kirsanova, Mathan Satchi, David Vines
Publication Date:	June 2004
Keyword(s):	asymmetric shocks, monetary union, optimal monetary and fiscal policies
JEL(s):	E52, E61, E63, F41
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=4433

This Paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.