Working Paper: CEPR ID: DP1547
Authors: Fabio Ghironi; Francesco Giavazzi
Abstract: The paper analyses monetary and fiscal policy interactions in a three-country world, interpreted to represent two EU economies and the rest of the world. The analysis extends well-known results in the literature on international policy spillovers by investigating the effects of different sizes of the two EU economies. A set of general results is derived, which allows a reinterpretation of earlier findings in the literature on policy-making in interdependent economies.
Keywords: international policy coordination; european monetary union
JEL Codes: F31; F33; F41; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB prefers a smaller currency union (F36) | ECB builds its anti-inflationary reputation quickly (E58) |
| Larger currency union dilutes ECB's influence (F36) | Complicates ECB's policy objectives (E52) |
| Ecofin prefers a larger currency union (F36) | Enhances stability and cooperation among member states (F55) |
| Conflicting preferences between ECB and Ecofin (F36) | Strategic interactions (C72) |
| ECB's tighter monetary policy (E52) | Negatively impacts employment (F66) |
| Ecofin advocates for more expansive fiscal measures (E62) | Enhances stability (C62) |
| Outsiders prefer to remain outside a large currency union (F36) | Exploit inflationary advantages (E31) |
| Strategic interactions (C72) | Initial size of the currency union is influenced (F36) |
| Differing objectives among policymakers (E61) | Potential conflicts arise (D74) |