Coordination And Stabilization Gains Of Fiscal Policy In A Monetary Union

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Executive Summary

The issue of fiscal coordination in a Monetary Union is recurrent as monetary policy can no longer be used as a national stabilization policy instrument. The authors measure the increase in welfare due to the coordination of fiscal policies in the typical Neo-Keynesian environment, where monetary policy would have significant and persistent real effects. They propose a decomposition of coordination gains into a deterministic and a stochastic parcel. They show that the deterministic fiscal coordination gain is high but that the stochastic gain, often called stabilization gain, is very small generating, for their calibration, an increase of 0.0161 percentage points, measured in consumption equivalents.

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