Fiscal Policies and Monetary Leadership in a Monetary Union with a Deficit-Concerned Central Bank

Georgios Chortareas and Christos Mavrodimitrakis

Central European Journal of Economic Modelling and Econometrics, 2011, vol. 3, issue 1, 1-24

Abstract: We consider fiscal and monetary policy interactions in a monetary union under monetary leadership, when the common central bank is concerned with the average fiscal stance of the union. We use a static two-country monetary union model to investigate the policy-mix problem under different regimes of noncooperation, cooperation, and enforced cooperation among fiscal authorities. We find that fiscal policy is unambiguously countercyclical, a feature that is more pronounced under fiscal policy cooperation. Monetary policy can be either countercyclical or procyclical. A central bank concerned about the aggregate fiscal stance is effective in stabilizing output and central budget, but at the expense of inflation stabilization.

Keywords: strategic interactions; EMU; monetary leadership; fiscal cooperation; central bank's objectives (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 E62 E63 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:psc:journl:v:3:y:2011:i:1:p:1-24

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