DP4790 Monetary and Fiscal policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve

Author(s): Peter Bofinger, Eric Mayer
Publication Date: December 2004
Keyword(s): fiscal policy, inflation targeting, monetary policy, policy coordination
JEL(s): E50, E60, H70
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4790

In this Paper we carry over a static version of a New Keynesian Macromodel a la Clarida Gali Gertler (1999) to a monetary union. We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are vulnerable and therefore in need of fiscal policy as an independent stabilization agent with room to breath.