How Do Monetary and Fiscal Policy Interact in the European Monetary Union?

Matthew Canzoneri, Robert Cumby () and Behzad Diba

No 11055, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model's variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).

JEL-codes: E63 F33 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Published as How Do Monetary and Fiscal Policy Interact in the European Monetary Union? , Matthew B. Canzoneri, Robert E. Cumby, Behzad T. Diba. in NBER International Seminar on Macroeconomics 2004 , Clarida, Frankel, Giavazzi, and West. 2006

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