Optimal fiscal policy of a monetary union member

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Title: Optimal fiscal policy of a monetary union member
Author: Orjasniemi, Seppo
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
Series number: 13/2014
Year of publication: 2014
Publication date: 10.6.2014
Pages: 24
Subject (yso): finanssipolitiikka; rahapolitiikka
Keywords: rahaliitot; julkiset menot; korot; häiriöt
JEL: E52; E62; F41
Abstract: In this essay we study the optimal noncoordinated fiscal policy in a monetary union, where a common and independent monetary authority commits to optimally set the union-wide nominal interest rate. The national governments in the monetary union implement independent fiscal policies by choosing the level of government expenditures. We show that under a non-coordinated optimal fiscal policy rule government spending should react counter cyclically to the local output gap and inflation, while the union-wide aggregate fluctuations are stabilized by the common monetary policy. We also show that the spillovers caused by asymmetric shocks depend on the relative size of the country subject to these shocks. Keywords: monetary union, monetary policy, fiscal policy JEL Classification: E52, E62, F41
Rights: https://helda.helsinki.fi/bof/copyright

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