Optimal Fiscal Policy Rules in a Monetary Union |
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| Authors: | TATIANA KIRSANOVA MATHAN SATCHI† DAVID VINES‡ SIMON WREN-LEWIS§ |
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| Institution: | Tatiana Kirsanova;is a Lecturer at the University of Exeter (E-mail:) . Mathan Satchi;is a Lecturer at the University of Kent (E-mail:) . David Vines;is a Professor at the University of Oxford and a Fellow of Balliol College. He is also an Adjunct Professor at the Research School of Pacific and Asian Studies, Australian National University, and a fellow of the Centre for Economic Policy Research, London (E-mail:) . Simon Wren-Lewis;is a Professor at the University of Oxford (E-mail:). |
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| 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, which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation, output, and the terms of trade, but that not much is lost if national fiscal policy is restricted to react, on the one hand, to national differences in inflation and, on the other hand, to either national differences in output or changes in the terms of trade. However, welfare is reduced if national fiscal policy responds only to output, ignoring inflation. |
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| Keywords: | E52 E61 E63 F41 |
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