Insulation impossible: monetary policy and regional fiscal spillovers in a federation

Russell Cooper, Hubert Kempf () and Dan Peled ()

Working papers from Banque de France

Abstract: This paper studies the effects of monetary policy rules in a fiscal federation, such as the European Union. The focus of the analysis is the interaction between the fiscal policy of member countries (regions) and the monetary authority. Each of the countries structures its fiscal policy (spending and taxes) with the interests of its citizens in mind. Ricardian equivalence does not hold due to the presence of monetary frictions, modeled here as reserve requirements. When capital markets are integrated, the fiscal policy of one country influences equilibrium wages and interest rates. Under certain rules, monetary policy may respond to the price variations induced by regional fiscal policies. Depending on the type of rule it adopts, interventions by the monetary authority affect the magnitude and nature of the spillover from regional fiscal policy.

Keywords: Monetary Union; Inflation tax; Seigniorage; monetary rules; public debt. (search for similar items in EconPapers)
JEL-codes: E31 E42 E58 E62 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Insulation Impossible: Monetary Policy and Regional Fiscal Spillovers in a Federation
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:293

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