DP5533 Optimal Fiscal Policy Rules in a Monetary Union

Author(s): Tatiana Kirsanova, Mathan Satchi, David Vines, Simon Wren-Lewis
Publication Date: March 2006
Keyword(s): monetary union, optimal monetary policy and fiscal policies, simple rules
JEL(s): E52, E61, E63, F41
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5533

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 which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation and output, but that not much is lost if national fiscal policy is restricted to react only to national differences in inflation and output.