Monetary and fiscal interactions in open economies

Alan Sutherland () and Giovanni Lombardo

No 289, Working Paper Series from European Central Bank

Abstract: A two-country sticky-price model is used to analyse the interactions between fiscal and monetary policy. The role of an 'activist' fiscal policy as a stabilisation tool is considered and a measure of the welfare gains from international fiscal policy cooperation is derived. It is found that welfare gains from fiscal cooperation do exist provided monetary policy is set cooperatively. There are also welfare gains from fiscal policy cooperation in a monetary union. However, it is found that a 'non-activist' fiscal policy can be better than non-cooperative fiscal policy when the international correlation of shocks is strongly negative. And non-cooperative fiscal policy can be better than cooperative fiscal policy if monetary policy is not set cooperatively. JEL Classification: E52, E58, F42

Keywords: fiscal and monetary policy; fiscal interaction; monetary interaction; open economy; policy coordination (search for similar items in EconPapers)
Date: 2003-11
Note: 656519
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Citations: View citations in EconPapers (12)

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Journal Article: Monetary and fiscal interactions in open economies (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2003289

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