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.