When the Taylor principle is insufficient: A benchmark for the fiscal theory of the price level in a monetary union

Maren Brede

No 2014-069, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: This paper derives restrictions on monetary and fiscal policies for determinate equilibria in a two-country monetary union with autarkic members. It finds that a central bank following the Taylor principle may not be sufficient for determinacy unless accompanied by one 'active' fiscal authority in the sense of Leeper (1991). Alternatively, both fiscal authorities can be 'active' while the central bank abandons the Taylor principle. The two determinate equilibria have significantly different implications for the transmission of fiscal and monetary shocks and for the fiscal theory of the price level in a monetary union.

Keywords: fiscal theory; monetary union; policy coordination; indeterminacy (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2014-069

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