Working Paper: CEPR ID: DP414
Authors: Paul Masson; Jacques Melitz
Abstract: Do plans for a monetary union in Europe call for limits on the freedom of the member countries to use fiscal policy? To provide a tentative answer, we simulate the IMF model MULTIMOD, given various shocks, in the case of a European Monetary Union consisting only of France and Germany. The results clearly indicate the possible value of allowing unfettered use of fiscal policy in both countries, The reasons lie partly in differences in the initial position of the two, partly in differences in their preferences. We also examine the change in the policy significance of the current account in the monetary union. Current account imbalances clearly cease to have the same significance in a monetary union; but they do not therefore become irreleva.
Keywords: European Monetary Union; Terms of Trade; Current Account Balance; Fiscal Policy
JEL Codes: 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexible fiscal policy (E62) | current account imbalances (F32) |
| fiscal contraction in France (H69) | current account balance in France (F32) |
| fiscal contraction in France (H69) | output in Germany (C67) |
| fiscal tightening in both countries (E63) | potential instability (C62) |
| independent fiscal policy (E62) | current account imbalances (F32) |