Optimal monetary and fiscal policy in a currency union |
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Authors: | Jordi Galí |
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Affiliation: | a CREI and Universitat Pompeu Fabra, Spain b IGIER, Università Bocconi and CEPR, Italy |
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Abstract: | We lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union. The monetary authority sets a common interest rate for the union, whereas fiscal policy is implemented at the country level, through the choice of government spending. In the presence of country-specific shocks and nominal rigidities, the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank, whereas fiscal policy has a country-specific stabilization role, one beyond the efficient provision of public goods. |
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Keywords: | Monetary union Sticky prices Countercyclical policy Inflation differentials |
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