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Fiscal policy coordination in currency unions at the effective lower bound

Thomas Hettig and M�ller, Gernot
Authors registered in the RePEc Author Service: Gernot J. Müller

No 11780, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 on a common fiscal stance, policy makers are able to stabilize union-wide activity and inflation while avoiding detrimental movements of a country's terms of trade.

Keywords: coordination; Currency union; effective lower bound; EMU; Fiscal policy; optimal policy; terms-of-trade externality (search for similar items in EconPapers)
JEL-codes: E61 E62 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-opm
Date: 2017-01
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