Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve |
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Authors: | Peter Bofinger Eric Mayer |
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Institution: | (1) University of Würzburg, Sanderring 2, 97070 Würzburg, Germany;(2) CEPR, Sanderring 2, 97070 Würzburg, Germany |
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Abstract: | In this paper we apply a static version of a New Keynesian macromodel to a monetary union (see Bofinger et al., J Econ Educ,
37:98–117 (2006), Walsh, J Econ Educ, 33:333–346 (2002)). We show in particular that a harmonious functioning of a monetary
union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration
in product markets is advantageous for the ECB as it prevents national interest rates from driving a wedge between macroeconomic
outcomes across member states. In particular small countries are in need for fiscal policy as an independent stabilization
agent with room to breath.
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Keywords: | Monetary policy Inflation targeting Fiscal policy Policy coordination |
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