NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Do Monetary and Fiscal Policy Interact in the European Monetary Union?

Matthew B. Canzoneri, Robert E. Cumby, Behzad T. Diba

NBER Working Paper No. 11055
Issued in January 2005
NBER Program(s):   IFM

Formation of the Euro area raises new questions about the coordination of monetary and fiscal policy. Using a New Neoclassical Synthesis (NNS) model, we show that a common monetary policy, responding to area-wide aggregates, has asymmetric effects on countries within the union, depending on whether they are large or small, or whether they have high or low debts. We analyze the implications of these asymmetries for the various countries welfare and for their fiscal policies. We also study rules for setting national tax and spending rates, rules that constrain movements in the deficit to GDP ratio. We ask whether these rules are necessary for the common monetary policy to be able to harmonize national inflation rates, and we analyze their effects on national welfare. We also discuss some potential failings of our model (and perhaps NNS models generally); in particular, our model's variance decompositions suggest that productivity shocks may play an inordinately large role, while fiscal shocks (or demand shocks generally) may play too small a role (even when 'rule of thumb' spenders are added).

download in pdf format
   (415 K)

email paper

This paper is available as PDF (415 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11055

Published: How Do Monetary and Fiscal Policy Interact in the European Monetary Union?, Matthew B. Canzoneri, Robert E. Cumby, Behzad T. Diba. in NBER International Seminar on Macroeconomics 2004, Clarida, Frankel, Giavazzi, and West. 2006

Users who downloaded this paper also downloaded these:
Gali and Perotti w9773 Fiscal Policy and Monetary Integration in Europe
Canzoneri, Cumby, and Diba How Do Monetary and Fiscal Policy Interact in the European Monetary Union?
Gali and Monacelli w11815 Optimal Monetary and Fiscal Policy in a Currency Union
Fatás and Mihov w14722 The Euro and Fiscal Policy
Davig and Leeper w15133 Monetary-Fiscal Policy Interactions and Fiscal Stimulus
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us