The interaction of fiscal and monetary policy in a monetary union: Balancing credibility and flexibility

R.M.W.J. Beetsma, A.L. Bovenberg

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Abstract

This paper explores how decentralized, national fiscal policies interact with a common monetary policy in a monetary union. We show that fiscal policy plays a more important ro le in stabilizing country-specific shocks than with national monetary policies. Whereas monetary u nification with an optimally designed central bank reduces both expected inflation and the varia nce of inflation, it harms overall welfare by reducing output and public spending and increasing the variability of these variables. However, international transfers may avoid this decline in welf are.
Original languageEnglish
PublisherUnknown Publisher
Number of pages29
Volume1995-101
Publication statusPublished - 1995

Publication series

NameCentER Discussion Paper
Volume1995-101

Keywords

  • Central Banks
  • Monetary Policy
  • Stabilization
  • Monetary Integration
  • Credibility
  • Fiscal Policy
  • monetary economics

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    Beetsma, R. M. W. J., & Bovenberg, A. L. (1995). The interaction of fiscal and monetary policy in a monetary union: Balancing credibility and flexibility. (CentER Discussion Paper; Vol. 1995-101). Unknown Publisher.