Optimal Fiscal Policy in a Monetary Union

Luisa Lambertini

Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne

Abstract: We study optimal fiscal policy in a monetary union where monetary policy is decided by an independent central bank. We consider a two-country model with trade in goods and assets, augmented with sticky prices, labor income taxes and stochastic government consumption. It is optimal to finance a shock in part by running deficits and in part by raising the labor income tax, even though the latter is distortionary. The optimal speed of adjustment of budget deficits is much higher than the benchmark adjustment of 0.5 percent of GDP per year required by the recent revision of the Stability and Growth Pact (SGP). Optimal fiscal policy does not depend on the initial level of public debt. Ramsey monetary policy allows for less aggressive and more expansionary response of fiscal policy than the monetary policy implied by an interest rates rule.

Keywords: Monetary Policy; Monetary Union; Fiscal Policy (search for similar items in EconPapers)
JEL-codes: E61 E62 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2007-01
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://infoscience.epfl.ch/record/109472/files/CFP2008_02.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cif:wpaper:200801

Access Statistics for this paper

More papers in Working Papers from Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne Contact information at EDIRC.
Bibliographic data for series maintained by Corinne Dubois ( this e-mail address is bad, please contact ).