Conference Paper

Optimal fiscal policy in a monetary union

Abstract: We lay out an optimizing multicountry framework suitable for fiscal policy analysis in a monetary union. We show that, for any given member country, the relinquishment of monetary policy independence, coupled with nominal price rigidity, generates a motive for fiscal stabilization beyond the optimal provision of public goods. This incentive depends on the degree of symmetry between that country?s and the union average natural rate of interest. Interestingly, this is shown to be the case despite fiscal policy being set, in each individual country, in order to maximize welfare at the level of the union as a whole.

Keywords: Fiscal policy; Monetary policy;

Status: Published in Fiscal and Monetary Policy : a conference (2005: March 4-5)

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Proceedings

Publication Date: 2005