Working Paper: NBER ID: w11055
Authors: Matthew B. Canzoneri; Robert Cumby; Behzad Diba
Abstract: Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model's variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).
Keywords: No keywords provided
JEL Codes: E63; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Common monetary policy (E52) | asymmetric effects (F69) |
| Size and debt levels (H63) | asymmetric effects of common monetary policy (E52) |
| Common monetary policy (E52) | welfare (I38) |
| Productivity shocks (O49) | volatility in deficit-to-GDP ratio (H68) |
| Fiscal shocks (E62) | volatility in deficit-to-GDP ratio (H68) |
| Fiscal constraints (H60) | welfare (I38) |
| Common monetary policy (E52) | welfare disparities (I39) |
| Fiscal constraints structured around government purchases (E62) | welfare (I38) |