Working Paper

Macroeconomic stabilization through monetary and fiscal policy coordination: implications for European Monetary Union

Abstract: In a two-country model, we consider the implications of monetary and fiscal policy coordination for macroeconomic stabilization. We show that the optimal regime is one of monetary and fiscal policy coordination under flexible exchange rates. In the context of the European Community, this suggests that the desire to fix exchange rates may not be costless. In addition, we show that, under an asymmetric demand shock, fiscal coordination requires a relatively high degree of flexibility in fiscal policy. This suggests that limits on the flexibility of fiscal policies, as suggested in the Delors Report, may hinder macroeconomic stabilization.

Keywords: Monetary unions - European Union countries;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 1993

Number: 453