Optimal Fiscal Policy Rules in a Monetary Union
Paper number: 06/11
Paper date: October 9, 2006
Paper Category: Working Paper
Tatiana Kirsanova, Mathan Satchi, David Vines and Simon Wren-Lewis
This paper investigates the importance of ﬁscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inﬂation and non-Ricardian consumers, and derive optimal simple rules for ﬁscal authorities. We ﬁnd that ﬁscal policy can play an important role in reacting to inﬂation, output and the terms of trade, but that not much is lost if national ﬁscal policy is restricted to react, on the one hand, to national diﬀerences in inﬂation and, on the other hand, to either national diﬀerences in output or changes in the terms of trade. However, welfare is reduced if national ﬁscal policy responds only to output, ignoring inﬂation.