The interplay of monetary and fiscal policies in a multinational currency union
by Marcelo Sanchez
International Journal of Monetary Economics and Finance (IJMEF), Vol. 3, No. 1, 2010

Abstract: In our multi-country currency union model, national fiscal authorities free ride on the single monetary authority, which leads to higher interest rate variability. We carry out welfare comparisons between monetary autonomy and currency union, assessing the sensitivity of results around calibrated parameter values. Under country-specific demand and supply disturbances, monetary union stabilisation is hampered by steeper supply slopes, a greater preference for price stability, governments' stronger fiscal objective focus and a higher sensitiveness of aggregate demand to real exchange rates. Sensitivity results are ambiguous for country size. Supply-driven small open economies may benefit from maintaining monetary sovereignty.

Online publication date: Thu, 03-Dec-2009

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