Monetary Union: Fiscal Stabilization in the Face of Asymmetric Shocks

Kirsanova, Tatiana; Satchi, Mathan; Vines, David

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Monetary Union: Fiscal Stabilization in the Face of Asymmetric Shocks

45 Pages Posted: 14 Jul 2004

See all articles by Tatiana Kirsanova

Tatiana Kirsanova

University of Glasgow - Adam Smith Business School

Mathan Satchi

University of Kent - Department of Economics

David Vines

University of Oxford - Balliol College - Department of Economics; Australian National University (ANU); Centre for Economic Policy Research (CEPR)

Date Written: June 2004

Abstract

This Paper investigates the importance of fiscal policy in providing macroeconomic stabilization in a monetary union. We use a microfounded New Keynesian model of a monetary union that incorporates persistence in inflation, and examine non-cooperative interactions of fiscal and monetary authorities. We find that particularly when inflation is persistent, the use of fiscal policy for stabilization can significantly improve welfare over and above that which arises through the working of automatic stabilizers. We conclude that a regulatory framework for fiscal policy in a monetary union should allow a role for active fiscal stabilization.

Keywords: Monetary union, optimal monetary and fiscal policies, asymmetric shocks

JEL Classification: E52, E61, E63, F41

Suggested Citation: Suggested Citation

Kirsanova, Tatiana and Satchi, Mathan and Vines, David, Monetary Union: Fiscal Stabilization in the Face of Asymmetric Shocks (June 2004). Available at SSRN: https://ssrn.com/abstract=564541