Working Paper: CEPR ID: DP5533
Authors: Tatiana Kirsanova; Mathan Satchi; David Vines; Simon Wren-Lewis
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 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.
Keywords: Monetary Union; Optimal Monetary Policy; Fiscal Policies; Simple Rules
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 |
|---|---|
| Fiscal policy (E62) | Stabilization of economies (E63) |
| Optimal fiscal rules (E62) | Welfare gains (D69) |
| Government expenditure adjusts to inflation and output disparities (H59) | Welfare gains (D69) |
| Fiscal feedback on government debt (E62) | Debt sustainability (F34) |
| Fiscal policy as a counter-cyclical tool (E62) | Stabilizing asymmetric shocks (E63) |