Optimal Monetary and Fiscal Policy in a Currency Union

Galí, Jordi and Tommaso Monacelli
Authors registered in the RePEc Author Service: Jordi Galí

No 5374, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We lay out a tractable model for fiscal and monetary policy analysis in a currency union, and analyse its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending level. The model incorporates country-specific shocks and nominal rigidities. Under our assumptions, the optimal monetary policy requires that inflation be stabilized at the union level. On the other hand, the relinquishment of an independent monetary policy, coupled with nominal price rigidities, generates a stabilization role for fiscal policy, one beyond the efficient provision of public goods. Interestingly, the stabilizing role for fiscal policy is shown to be desirable not only from the viewpoint of each individual country, but also from that of the union as a whole. In addition, our paper offers some insights on two aspects of policy design in currency unions: (i) the conditions for equilibrium determinacy and (ii) the effects of exogenous government spending variations.

Keywords: Monetary union; Sticky prices; Countercyclical policy; Inflation differentials (search for similar items in EconPapers)
JEL-codes: E52 E62 F41 (search for similar items in EconPapers)
Date: 2005-11
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Downloads: (external link)
https://cepr.org/publications/DP5374 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Optimal Monetary and Fiscal Policy in a Currency Union (2015)
Journal Article: Optimal monetary and fiscal policy in a currency union (2008)
Working Paper: Optimal Monetary and Fiscal Policy in a Currency Union (2005)
Working Paper: Optimal Monetary and Fiscal Policy in a Currency Union (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5374

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5374

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().