Type: Working Paper
Insulation Impossible: Fiscal Spillovers in a Monetary Union
Working Paper, EUI ECO, 2010/20
COOPER, Russell, KEMPF, Hubert, PELED, Dan, Insulation Impossible: Fiscal Spillovers in a Monetary Union, EUI ECO, 2010/20 - http://hdl.handle.net/1814/13795
Retrieved from Cadmus, EUI Research Repository
This paper studies fiscal spillovers in a monetary union. The focus of the analysis is on the interaction between the fiscal policy of member countries (regions) and the central monetary authority. When capital markets are integrated, the fiscal policy of one country will inuence equilibrium wages and interest rates. Thus there are fiscal spillovers within a federation. The magnitude and direction of these spillovers, in particular the presence of a crowding out effect, can be inuenced by the choice of monetary policy rules. We find that there does not exist a monetary policy rule which completely insulates agents in one region from fiscal policy in another. Some familiar policy rules, such as pegging an interest rate, can provide partial insulation.
Cadmus permanent link: http://hdl.handle.net/1814/13795
Series/Number: EUI ECO; 2010/20