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Fiscal policy coordination in currency unions at the effective lower bound

Thomas Hettig and Gernot Müller

Journal of International Economics, 2018, vol. 115, issue C, 80-98

Abstract: According to the pre-crises consensus there are separate domains for monetary and fiscal stabilization in a currency union. While the common monetary policy takes care of union-wide fluctuations, fiscal policies should be tailored to meet country-specific conditions. This separation is no longer optimal, however, if monetary policy is constrained by an effective lower bound on interest rates. Specifically, we show that in this case there are benefits from coordinating fiscal policies across countries. By coordinating fiscal policies, policymakers are better able to stabilize union-wide activity and inflation while avoiding detrimental movements of a country's terms of trade.

Keywords: Currency union; Fiscal policy; Effective lower bound; Coordination; EMU; Terms-of-trade externality; Optimal policy (search for similar items in EconPapers)
JEL-codes: E61 E62 F41 (search for similar items in EconPapers)
Date: 2018
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