Macroeconomic Stabilization in the EMU: Rules Versus Institutions

Abstract

This paper investigates the macroeconomic implications of different regimes of international fiscal coordination and monetary‐fiscal cooperation in a monetary union with independent fiscal authorities, that act strategically vis‐à‐vis a common central bank. In the presence of other policy goals than cyclical stabilization, such as interest rate smoothing and fiscal stability, we show that coordination among national fiscal authorities can reduce output and inflation volatility relative to the non‐cooperative setting in specific circumstances, as in case of demand disturbances, while turning potentially counterproductive otherwise. The adverse effects of union‐wide coordinated fiscal measures can be attenuated in a regime of global coordination, namely, when a centralized fiscal stabilization is coordinated with the common monetary policy as well.

Monetary and Fiscal Policies Interaction in Monetary Unions

“…When the model does not directly involve private agents, social welfare is measured by a micro-founded social loss function (see for instance Dixit and Lambertini, 2003b;Lambertini, 2006;Galí and Monacelli, 2008;and Ferrero, 2009). As in most of the cases this function results in a combination of (1) and (2) (see Lambertini and Rovelli, 2004;Cavallari and Di Gioacchino, 2005), the total social welfare can also be addressed by measuring the authorities' loss at the equilibrium. This is the welfare criterion adopted in this paper.…”

Intertemporal Budget Policies and Macroeconomic Adjustment in Indebted Open Economies

“…Related to the current debt crisis of small open economies in Europe such as Greece, Portugal, Ireland and Cyprus more recently; see e.g. Cavallari and Gioacchino (), Colciago et al () and Alesina and Ardagna (). On the effects of inflation see Engen and Hubbard (), Aizenman and Marion () and Hall and Sargent ().…”

Essays on fiscal and monetary policy interactions in a monetary union

“…In the general case, the two countries would compete for aggressiveness of automatic stabilisers due to the implied reaction of the monetary policy, thus shifting the problem of policy coordination without eliminating it. Cavallari and Di Gioacchino (2005) investigate the macroeconomic implications of both fiscal policy coordination and fiscal-monetary (overall) policy coordination under different cyclical conditions. The authors consider both the vertical and the horizontal coordination problems in a monetary union and they focus upon union-wide output and inflation outcomes.…”

“…(1999), a model assuming monopolistic competition in product markets and nominal rigidities in terms of a Calvo price-setting rule (Calvo, 1983) can be summarised to a first approximation by those two equations. 60 According to Cavallari and Di Gioacchino (2005), central bankers prefer not to change short-run interest rates, as this would result in large variations in the prices of outstanding debts.…”

“…Oros (2012) assumes that the national fiscal authorities in a monetary union have private information on their specific shocks, which creates an incentive to manipulate the common central bank. The author uses a model similar to Cavallari and Di Gioacchino (2005) in a two-country setting that considers an heterogeneity in the monetary policy transmission mechanism between the two member-states (see, also, Oros, 2008) under demand shocks. The author first solves the full-information case, arguing that it is the policy instruments' complementarity that can trigger the fiscal authorities to give false information to the common central bank in order to economise on their costly policy instrument.…”