Monetary and Fiscal Policy Interactions in a Monetary Union with Country-size Asymmetry

Celsa Machado () and Ana Ribeiro
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Celsa Machado: ISCAP - Instituto Superior de Contabilidade e Administração do Porto

CEF.UP Working Papers from Universidade do Porto, Faculdade de Economia do Porto

Abstract: This paper analyses optimal discretionary non-coordinated monetary and fiscal stabilization policies in a micro-founded New-Keynesian model of a two-country monetary union with country-size asymmetry, under two policy scenarios. A balanced-budget policy scenario and a policy scenario where the presence of government debt limits the macroeconomic stabilization effort and enlarges the sources of strategic policy interactions. Numerical results indicate that non-cooperation exacerbates the fiscal policy activism of a small country while moderating that of a large country. In the balanced-budget scenario, non-cooperation improves (reduces) welfare for a small (large) country while, in the high-debt scenario, it produces the opposite results. Cooperation dominates non-cooperation for the union as a whole.

Keywords: Monetary union; optimal fiscal and monetary policies; asymmetric countries. (search for similar items in EconPapers)
JEL-codes: E52 E61 E62 E63 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2010-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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