Monetary and Fiscal Policy Interaction: The Consequences of Joining a Monetary Union

Jones, Jason Cannon (2009) Monetary and Fiscal Policy Interaction: The Consequences of Joining a Monetary Union. In: UNSPECIFIED.

Preview

PDF - Published Version Download (280Kb) | Preview

Abstract

The great experiment in monetary unification across Europe is just beginning to provide the data needed to test the theories and debates surrounding the costs and benefits of forming a union. This paper will explore one particular aspect of the unification process, the effect it had on monetary and fiscal strategic interaction. Using a panel structural VAR to measure monetary and fiscal policy interaction among EMU members before and after joining the EMU, a difference in this interaction is detected. Pre‐EMU the monetary and fiscal authority acted as strategic substitutes in the case of a monetary response to a fiscal receipts shock (such as a discretionary increase in taxes). After the formation of the union this relationship disappears and there is no strategic interaction. The timing of the change suggests a role for the Maastricht treaty coupled with the weak SGP

Actions (login required)