Partisan Fiscal Policy in a Monetary Union: Asymmetric Shocks, Delegation and Welfare

Álvaro Pina

No 2000/10, Working Papers Department of Economics from ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa

Abstract: This paper studies the impact of partisan national fiscal policy on the optimal central bank design of a two-country monetary union. In each country two parties with different preferences compete for office, their succession in power being formalized as zero-mean political shocks. These contrast with supply disturbances both because political shocks call for more, rather than less, central bank conservatism and insofar as cross-country shock asymmetry is actually beneficial to welfare. Further, by combining Rogoff-type 'weight-conservatism' with an inflation target it is possible to ensure that monetary delegation always benefits both parties.

Keywords: Political cycles; monetary union; central bank independence; asymmetric shocks. (search for similar items in EconPapers)
JEL-codes: D72 E52 E58 E62 (search for similar items in EconPapers)
Date: 2000
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