Optimal discretionary monetary and fiscal policies in a country-size heterogeneous monetary union

• Type: Article in International Scientific Journal
• Date: 2018

Authors

Vieira, P (Author) Other; Machado, C (Author) Other; Ana Ribeiro (Author) FEP

Journal

Title: Journal of Economic Dynamics and Control

Vol. 93

Pages: 154-174

ISSN: 0165-1889

Indexing

ISI Web of Knowledge - 4 Citations

Scopus - 4 Citations

Other information

Authenticus ID: P-00N-N6P

DOI: 10.1016/j.jedc.2018.01.043

Abstract (EN): This paper develops a New Keynesian model of a monetary union where atomistic-small economies coexist with a large economy. It explores how the level of public debt shapes non-cooperative discretionary policies. It evaluates welfare losses for small and large member countries. The paper demonstrates that higher public debt levels hamper business cycle stabilization for the union as a whole and, in particular, penalize the stabilization performance of small country-members. While cooperation and monetary leadership is preferable to fiscal leadership for the union as whole and for the small countries, the big country prefers fiscal leadership, where it explores a larger strategic power vis-a-vis the common monetary policy authority. Political support for cooperation may be hard to achieve. Under low debt levels, cooperative stabilization outcomes are relatively similar to the non-cooperative ones.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 21