Is Fiscal Policy Coordination in Emu Desirable?, Issues 2001-2178
International Monetary Fund, IMF Institute, Nov 1, 2001 - Business & Economics - 44 pages
It is widely argued that Europe's unified monetary policy calls for international coordination at the fiscal level. We survey the issues involved in such coordination in the perspective of macroeconomic stabilization. A simple model identifies the circumstances under which coordination may be desirable. Coordination is beneficial when the cross-country correlation of the shocks is low. However, given the potentially adverse reaction by the ECB (as a result of free-riding or a conflict on the orientation of the policy mix), fiscal coordination is likely to prove counterproductive when demand or supply shocks are highly symmetric across countries and the governments are unable to acquire a strategic leadership position vis-à-vis the ECB.
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aggregate demand Amsterdam Treaty Beetsma and Bovenberg budget Buti and Sapir central bank commitment conflict cooperative counterproductive coordination counterproductive fiscal coordination countries country-specific demand shocks desirability of fiscal deviate ECB's Reaction ECOFIN economic effect equilibrium Eurogroup European Union ex-ante ex-post coordination first-mover advantage fiscal expansion fiscal impulse fiscal policy coordination Fiscal Reaction Functions fiscal stance Foreign fiscal free-riding problem Growth Pact Home fiscal authority inflation rate Liberal Governments loss functions Maastricht Treaty macroeconomic monetary and fiscal monetary policy monetary union Nash coordination Nash equilibrium national fiscal policies national governments negative spillovers nominal interest rate non-coordination output and inflation Perfectly Asymmetric Shocks policy assignment policy instruments policy mix policymakers pre-commitment capacity price stability real exchange rate real interest rate Representative Governments social loss specific Stability and Growth stabilization burden Stackelberg coordination strategic interaction strategic substitutes structural deficit subsection supply shocks symmetric demand trade-off Treaty zero