Fiscal Policy Coordination in a Monetary Union
With the formation of the EMU, several EU countries have effectively closed a channel for potential stabilization of cyclical fluctuations, namely that of independent monetary policies. Taking the benefits of monetary unification as granted, this nevertheless raises the question of whether other policy measures can replace the flexibility lost? A natural candidate is cyclical fiscal policies, which is (still) under the auspices of the national governments in the EMU area.1 In the advent of an asymmetric shock hitting a member country, a common monetary policy response is clearly not suitable. Instead, some national discretionary fiscal policy action could be warranted. However, in a highly integrated economic environment, national fiscal policies are likely to have spill-overs on other countries. This begs the question whether some form of fiscal coordination is useful in order to internalize the externalities associated with unilateral policy measures? It is the main objective of this project to shed light on this question.