Bulletin n. 2/2007 | ||
October 2007 | ||
Bofinger Peter, Mayer Eric |
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Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve | ||
in Open Economies Review , Volume 18, Number 3 , 2007 , 291-305 | ||
In this paper we apply a static version of a New Keynesian macromodel to a monetary union (see Bofinger et al., J Econ Educ, 37:98-117 (2006), Walsh, J Econ Educ, 33:333-346 (2002)). We show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents national interest rates from driving a wedge between macroeconomic outcomes across member states. In particular small countries are in need for fiscal policy as an independent stabilization agent with room to breath. | ||