International Finance Discussion Papers (IFDP)
May 1994
Fiscal Policy Coordination and Flexibility Under European Monetary Union: Implications for Macroeconomic Stabilization
Jay H. Bryson
Abstract:
Some writers have proposed that under European Monetary Union fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. The paper shows that, in theory, fiscal policy coordination may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the Multi-Country Model of the Federal Reserve Board. The results suggest that fiscal policy coordination under EMU may require more fiscal activism rather than less. The results also show that, regardless of the shock, fiscal policy coordination among EMU members provides more macroeconomic stabilization to the United States. However, due to the small spillovers between the EC and the United States, the magnitude of this increased stabilization is relatively trivial.
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.