Abstract
A two-country sticky-price model is used to analyse the interactions between fiscal and monetary policy. The role of an 'activist' fiscal policy as a stabilisation tool is considered and a measure of the welfare gains from international fiscal policy cooperation is derived. It is found that welfare gains from fiscal cooperation do exist provided monetary policy is set cooperatively. There are also welfare gains from fiscal policy cooperation in a monetary union. However, it is found that a 'non-activist' fiscal policy can be better than non-cooperative fiscal policy when the international correlation of shocks is strongly negative. And noncooperative fiscal policy can be better than cooperative fiscal policy if monetary policy is not set cooperatively. (C) 2003 Elsevier Inc. All rights reserved.
| Original language | English |
|---|---|
| Pages (from-to) | 319-348 |
| Number of pages | 29 |
| Journal | Journal of Macroeconomics |
| Volume | 26 |
| DOIs | |
| Publication status | Published - Jun 2004 |
Keywords
- fiscal and monetary policy
- policy coordination