首页|The policy mix in a monetary union: Who bears the burden of asymmetric shocks' stabilisation?
The policy mix in a monetary union: Who bears the burden of asymmetric shocks' stabilisation?
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NETL
NSTL
Wiley
We utilise a standard reduced-form neo-Keynesian model in a monetaryunion, in which the monetary authority and the fiscal authorities strategicallyinteract, to explore who, under alternative institutional arrangements (strategic and fiscal regimes) and shocks' configurations, bears the burden of asymmetric shocks' stabilisation. We show that in the core/periphery fiscal regime,described by an asymmetry in the sequence of moves between the core and theperipheral member-states, asymmetric shocks pass through at the union levelto the inflation rate and the output gap when there are strategically significantspill-over effects and the monetary policy's and fiscal policies' instruments arenot perfect substitutes in the stabilisation process. The monetary authorityreacts to asymmetric shocks, but does not succeed in fully offsetting them. Thefirst best implies the coordination of fiscal policies. A second best embraces thefiscal leadership strategic regime (as a form of implicit coordination), whenthere are strong interconnections in the union, or the use of policy instrumentsby the fiscal authorities that directly decrease inflation when fiscal policy isexpansionary, such as taxes, production subsidies or public investment, whenthere is a strong cost channel of monetary policy.
NETL
NSTL
Wiley
