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
978-3-95729-316-9
Sprache
Englisch

Erschienen in
Series: Bundesbank Discussion Paper ; No. 44/2016

Klassifikation
Wirtschaft
Open Economy Macroeconomics
Macroeconomic Issues of Monetary Unions
Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Thema
Monetary union
Optimal monetary and fiscal policy
Exchange rate

Ereignis
Geistige Schöpfung
(wer)
Kaufmann, Christoph
Ereignis
Veröffentlichung
(wer)
Deutsche Bundesbank
(wo)
Frankfurt a. M.
(wann)
2016

Handle
Letzte Aktualisierung
10.03.2025, 11:41 MEZ

Datenpartner

Dieses Objekt wird bereitgestellt von:
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Objekttyp

  • Arbeitspapier

Beteiligte

  • Kaufmann, Christoph
  • Deutsche Bundesbank

Entstanden

  • 2016

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