Is Fiscal Policy Coordination in EMU Desirable?
November 1, 2001
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Summary
It is widely argued that Europe's unified monetary policy calls for international coordination at the fiscal level. We survey the issues involved in such coordination in the perspective of macroeconomic stabilization. A simple model identifies the circumstances under which coordination may be desirable. Coordination is beneficial when the cross-country correlation of the shocks is low. However, given the potentially adverse reaction by the ECB (as a result of free-riding or a conflict on the orientation of the policy mix), fiscal coordination is likely to prove counterproductive when demand or supply shocks are highly symmetric across countries and the governments are unable to acquire a strategic leadership position vis-à-vis the ECB.
Subject: Economic theory, Financial services, Fiscal policy, Fiscal stance, Inflation, Price stabilization, Prices, Real interest rates, Supply shocks
Keywords: aggregate demand, demand management, E. fiscal policy coordination, EMU, EMU desirable, Europe, fiscal authorities, fiscal coordination, governments vis-à-vis, IMF Institute, Inflation, inflation rate, interest rate, loss function, monetary policy, point of view, Policy coordination, Price stabilization, Real interest rates, Representative government, shocks, solvency constraint, Supply shocks, WP
Pages:
46
Volume:
2001
DOI:
Issue:
178
Series:
Working Paper No. 2001/178
Stock No:
WPIEA1782001
ISBN:
9781451858952
ISSN:
1018-5941
