Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union

Barry Eichengreen () and Fabio Ghironi ()

Open Economies Review, 2002, vol. 13, issue 4, pages 381-411

Abstract: We develop a model of monetary and fiscal policies appropriate for considering U.S.-European policy interactions in an era of near-balanced budgets and European monetary union. We study the determinants of policy trade-offs and incentives for central banks and governments across the Atlantic. Smaller, more open economies face more favorable trade-offs, since openness enhances policy effectiveness via the exchange-rate channel. Changes in Europe's monetary arrangements do not affect U.S. trade-offs, although they alter the trade-offs facing European policy-makers. Fiscal trade-offs depend crucially on the extent to which fiscal policy is distortionary. Changes in taxes and spending move both employment and inflation in the desired direction following a worldwide supply shock when spending is financed with distortionary taxes. Copyright Kluwer Academic Publishers 2002

Keywords: employment-inflation trade-off; exchange-rate regimes; fiscal distortions; fiscal policy; international cooperation; monetary policy (search for similar items in EconPapers)
Date: 2002
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