Working Paper: CEPR ID: DP4433
Authors: Tatiana Kirsanova; Mathan Satchi; David Vines
Abstract: 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 that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilisation can significantly improve welfare over and above that which arises through the working of automatic stabilisers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilisation.
Keywords: asymmetric shocks; monetary union; optimal monetary and fiscal policies
JEL Codes: E52; E61; E63; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Active fiscal policy (E62) | Welfare (I38) |
| Fiscal policy manages asymmetric supply shocks (E63) | Welfare (I38) |
| Fiscal policy mitigates cyclical adjustments from asymmetric shocks (E63) | Economic stability (E60) |