Fiscal Policy Coordination and Flexibility Under European Monetary Union: Implications for Macroeconomic Stabilization
Abstract
Some writers have proposed that under European Monetary Union fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. The paper shows that, in theory, fiscal policy coordination may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the Multi-Country Model of the Federal Reserve Board. The results suggest that fiscal policy coordination under EMU may require more fiscal activism rather than less. The results also show that, regardless of the shock, fiscal policy coordination among EMU members provides more macroeconomic stabilization to the United States. However, due to the small spillovers between the EC and the United States, the magnitude of this increased stabilization is relatively trivial.
Board ofGovernors ofthe Federal Reserve System International Finance Discussion Papers Number467 May 1994 FISCAL POLICYCOORDINATION AND FLEXIBILITY UNDER EUROPEAN MONETARY UNION: IMPLICATIONS FOR MACROECONOMIC STABILIZATION Jay H. Bryson NOTE: International Finance Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. References in publications to International Finance Discussion Papers (otherthan an acknowledgment that the writer has had access to unpublished material) should be cleared with the authororauthors.
Cite this document
Jay H. Bryson (1994). Fiscal Policy Coordination and Flexibility Under European Monetary Union: Implications for Macroeconomic Stabilization (IFDP 1994-467). Board of Governors of the Federal Reserve System, International Finance Discussion Papers. https://whenthefedspeaks.com/doc/ifdp_1994-467
@techreport{wtfs_ifdp_1994_467,
author = {Jay H. Bryson},
title = {Fiscal Policy Coordination and Flexibility Under European Monetary Union: Implications for Macroeconomic Stabilization},
type = {International Finance Discussion Papers},
number = {1994-467},
institution = {Board of Governors of the Federal Reserve System},
year = {1994},
url = {https://whenthefedspeaks.com/doc/ifdp_1994-467},
abstract = {Some writers have proposed that under European Monetary Union fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. The paper shows that, in theory, fiscal policy coordination may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the Multi-Country Model of the Federal Reserve Board. The results suggest that fiscal policy coordination under EMU may require more fiscal activism rather than less. The results also show that, regardless of the shock, fiscal policy coordination among EMU members provides more macroeconomic stabilization to the United States. However, due to the small spillovers between the EC and the United States, the magnitude of this increased stabilization is relatively trivial.},
}