Working Paper: NBER ID: w15176
Authors: Russell Cooper; Hubert Kempf; Dan Peled
Abstract: This paper studies fiscal spillovers in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be influenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.
Keywords: Fiscal Spillovers; Monetary Union; Central Bank; Fiscal Policy
JEL Codes: E61; E63; F15; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy of one region (H39) | Equilibrium wages in another region (F16) |
| Fiscal policy of one region (H39) | Interest rates in another region (E43) |
| Fiscal policy of one region (H39) | Fiscal spillovers within a federation (H77) |
| Monetary policy rules (E52) | Magnitude and direction of spillovers (F69) |
| Increased debt by one region (H69) | Lower capital economy-wide (E22) |
| Lower capital economy-wide (E22) | Wages in other regions (J39) |
| Lower capital economy-wide (E22) | Interest rates in other regions (E49) |
| Fiscal policy decisions in one region (H39) | Relative prices in other regions (P22) |
| Monetary transfers (F24) | Income effects (H31) |
| Income effects (H31) | Spillovers (O36) |