Fiscal Policy and Macroeconomic Stability Within a Currency Union

David Vines, Simon Wren-Lewis and Tatiana Kirsanova

No 5584, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyse the stability of countries within a monetary union in the face of asymmetric shocks, using a simple but widely applicable model. We show that members of the union may be subject to severe, and possibly unstable, cycles following asymmetric shocks if there is a significant backward looking element in inflation behaviour, and if real interest rates influence the level of aggregate demand. This cyclical instability can be mitigated if fiscal policy in each member country reacts to inflation differences, but it can be aggravated if fiscal feedback on debt is too strong.

Keywords: Monetary and fiscal policies; Monetary union; Macroeconomic stability (search for similar items in EconPapers)
JEL-codes: E52 E61 E63 F41 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
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Citations: View citations in EconPapers (15)

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