Working Paper

Insulation impossible: fiscal spillovers in a monetary union

Abstract: This paper studies the effects of monetary policy rules in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will influence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be influenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.

JEL Classification: E6; F33; F36;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2009

Number: 30

Pages: 21 pages

Note: Published as: Cooper, Russell, Hubert Kempf and Dan Peled (2014), "Insulation Impossible: Monetary Policy and Regional Debt Spillovers in a Federal," Journal of the European Economic Association 12 (2): 465-491.