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Policy Spillovers and Synergies in a Monetary Union

Oscar Arce (), Samuel Hurtado () and Carlos Thomas ()

International Journal of Central Banking, 2016, vol. 12, issue 3, 219-277

Abstract: We provide a general equilibrium framework for analyzing the effects of supply- and demand-side policies, and the potential synergies between them, in an asymmetric monetary union that faces a liquidity trap and a slow deleveraging process in its “periphery.” We find that the joint implementation of pro-competition structural reforms in the periphery, a fiscal expansion in the “core,” and forward guidance about the future path of nominal interest rates produces positive synergies between the three policies: forward guidance reinforces the expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance. Our results provide a case for complementing current unconventional monetary stimuli in the euro area with national efforts on the structural reform and fiscal fronts.

Date: 2016
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Handle: RePEc:ijc:ijcjou:y:2016:q:3:a:6