Transatlantic Trade-Offs in the Age of Balanced Budgets and European Monetary Union |
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Authors: | Eichengreen Barry Ghironi Fabio |
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Institution: | (1) Department of Economics, University of California, Berkeley, 549 Evans Hall #3880, Berkeley, CA, 94720-3880;(2) Department of Economics, Boston College, Carney Hall 131, Chestnut Hill, MA, 02467-3806 |
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Abstract: | We develop a model of monetary and fiscal policies appropriate for considering U.S.-European policy interactions in an era of near-balanced budgets and European monetary union. We study the determinants of policy trade-offs and incentives for central banks and governments across the Atlantic. Smaller, more open economies face more favorable trade-offs, since openness enhances policy effectiveness via the exchange-rate channel. Changes in Europe's monetary arrangements do not affect U.S. trade-offs, although they alter the trade-offs facing European policy-makers. Fiscal trade-offs depend crucially on the extent to which fiscal policy is distortionary. Changes in taxes and spending move both employment and inflation in the desired direction following a worldwide supply shock when spending is financed with distortionary taxes. |
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Keywords: | employment-inflation trade-off exchange-rate regimes fiscal distortions fiscal policy international cooperation monetary policy |
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