Monetary and Fiscal Interactions in Open Economies

Giovanni Lombardo, Alan Sutherland

    Research output: Contribution to journalArticlepeer-review

    25 Citations (Scopus)

    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 languageEnglish
    Pages (from-to)319-348
    Number of pages29
    JournalJournal of Macroeconomics
    Volume26
    DOIs
    Publication statusPublished - Jun 2004

    Keywords

    • fiscal and monetary policy
    • policy coordination

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