Fiscal and Monetary Rules for a Currency Union

By A. Ferrero. Social Science Research Network, 2009

263 citations recorded by the source corpus.

This paper addresses the optimal joint conduct of fiscal and monetary policy in a two-country model of a currency union with staggered price setting and distortionary taxes. A tractable linear-quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules. In the optimal equilibrium, monetary policy should achieve aggregate price stability following a flexible inflation targeting rule. Fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level. Simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules. Conversely, the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a8c44bc5cf0f01fefef5417903cd0a00334e54ca

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Citations in the corpus

Monetary Conservatism and Fiscal Policy (2008, background): “An important strand of the literature, developed by Sargent and Wallace (1981), Leeper (1991), and Woodford (2001), studies monetary and fiscal policy interactions using policy rules, e.g., Schmitt-Grohe and Uribe (2007) and Ferrero (2005) .”
The Macroeconomic Costs and Benefits of the EMU and Other Monetary Unions: An Overview of Recent Research (2010, unknown): “Other related contributions are Evi Pappa and Vanghelis Vassilatos (2007), Jordi Galí and Tommaso Monacelli (2008), and Andrea Ferrero (2009).”