Arbeitspapier
Optimal fiscal substitutes for the exchange rate in a monetary union
This paper studies Ramsey-optimal monetary and fiscal policy in a New Keynesian 2-country open economy framework, which is used to assess how far fiscal policy can substitute for the role of nominal exchange rates within a monetary union. Giving up exchange rate flexibility leads to welfare costs that depend significantly on whether the law of one price holds internationally or whether firms can engage in pricing-tomarket. Calibrated to the euro area, the welfare costs can be reduced by 86% in the former and by 69% in the latter case by using only one tax instrument per country. Fiscal devaluations can be observed as an optimal policy in a monetary union: if a nominal devaluation of the domestic currency were optimal under flexible exchange rates, optimal fiscal policy in a monetary union is an increase of the domestic relative to the foreign value added tax.
- ISBN
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978-3-95729-316-9
- Language
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Englisch
- Bibliographic citation
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Series: Bundesbank Discussion Paper ; No. 44/2016
- Classification
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Wirtschaft
Open Economy Macroeconomics
Macroeconomic Issues of Monetary Unions
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- Subject
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Monetary union
Optimal monetary and fiscal policy
Exchange rate
- Event
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Geistige Schöpfung
- (who)
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Kaufmann, Christoph
- Event
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Veröffentlichung
- (who)
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Deutsche Bundesbank
- (where)
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Frankfurt a. M.
- (when)
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2016
- Handle
- Last update
-
10.03.2025, 11:41 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Kaufmann, Christoph
- Deutsche Bundesbank
Time of origin
- 2016
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