Oxford Bulletin of Economics and Statistics (2022)
Matsuoka Hideaki
By Müller Gernot and Hettig Thomas
Working Paper (2018)
According to the pre-crises consensus there are separate domains for monetary and fiscal stabilization in a currency union. While the common monetary policy takes care of unionwide fluctuations, fiscal policies should be tailored to meet country-specific conditions. This separation is no longer optimal, however, if monetary policy is constrained by an effective lower bound on interest rates. Specifically, we show that in this case there are benefits from coordinating fiscal policies across countries. By coordinating fiscal policies, policymakers are better able to stabilize union-wide activity and inflation while avoiding detrimental movements of a country's terms of trade.
Müller G. and Hettig T. (2018) Fiscal policy coordination in currency unionsat the effective lower bound. Working Paper.