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Query: faculty: "FEB" and publication year: "2001"

AuthorsR.M.W.J. Beetsma, X. Debrun, F.J.G.M. Klaassen
TitleIs fiscal policy coordination in EMU desirable?
FacultyFaculty of Economics and Business
Institute/dept.FEB: Amsterdam School of Economics Research Institute (ASE-RI)
KeywordsEMU; Fiscal policy
AbstractIt is widely argued that Europe's unified monetary policy calls for international coordination of fiscal policy. This paper surveys the issues involved with the coordination of fiscal policies as a demand management tool. We discuss ex-ante and ex-post coordination. The former operates through binding agreements (pre-commitment), while the latter is ad-hoc, depending on the current state of affairs. We propose a simple model to investigate the circumstances under which coordination may or may not be desirable. The model focuses on the design of stabilization policies in the presence of demand and supply shocks. It assumes that fiscal policy is the exclusive responsibility of governments trading off the variability of deficits against output variability and, possibly, variability in inflation. Monetary policyis delegated to the ECB, which trades off price stability against fluctuations in the interest rate (its policy instrument). We compare a non-cooperative scenario with fiscal coordination. We further distinguish between the fiscal authorities jointly playing Nash against the ECB (a proxy of ex-post coordination) and them acting as Stackelberg leaders against the ECB (a proxy of ex-ante coordination). Fiscal coordination may be counterproductive because of the adverse reaction of the ECB to the coordination efforts of the governments. Coordination is most likely to be beneficial when shocks are asymmetric because union-wide aggregates are only mildly affected, which leads to a passive monetary policy. Ex-ante coordination is more desirable because it presupposes a commitment capacity that helps the governments to acquire a strategic leadership position against the central bank.

JEL Classification: E52, E58, E61, E62, E63.
Document typeArticle
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