Beetsma, R. and Jensen, H. (2004). Mark-up Fluctuations and Fiscal Policy Stabilization in a Monetary Union Journal of Macroeconomics, 26(2):357--376.
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Affiliated author
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Publication year2004
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JournalJournal of Macroeconomics
We study optimal monetary and fiscal stabilization policies in a two-country, micro-founded model of a monetary union featuring price rigidities, monopolistic competition and (inefficient) mark-up shocks. With symmetric rigidities, fiscal policy is not employed in stabilizing union-level variables. Countries' relative spending levels, however, are used to stabilize relative inflation rates and the terms of trade. Under commitment, both monetary policy and relative spending are inertial, while this is not the case under discretion. Numerical analyses indicate substantial welfare gains from commitment and from fiscal stabilization. We conclude by investigating some simple monetary and fiscal policy rules.