Macroeconomic stabilization in a heterogeneous monetary union: some insights into the effects of fiscal policy coordination

Cornel Oros

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Abstract: This paper studies the effects the fiscal coordination can have in terms of macroeconomic stabilization in a monetary Union which is heterogeneous at the level of the mechanisms of monetary policy transmission. We will use a static Keynesian model in a closed monetary Union and will prove that the stabilization effectiveness depends mainly on the type and origin of the economic shocks affecting the Union members (demand or supply shocks, domestic or foreign shocks) and on the extent of the Union's structural heterogeneity. In the case of the demand shocks, the fiscal policy coordination proves to be an optimal shock absorber only for the countries to which these shocks are specific. In the case of the supply shocks, it can represent an efficient instrument of stabilization especially if the Union''s structural heterogeneity is weak.

Date: 2008
Note: View the original document on HAL open archive server: https://hal.science/hal-00954298
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Published in Economics Bulletin, 2008, 5 (34), pp.1-12

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