Insulation Impossible: Monetary Policy And Regional Fiscal Spillovers In A Federation
This paper studies the interactions of fiscal and monetary policies in the presence of fiscal spillovers within a monetary union. When capital markets are integrated, the fiscal policy of any member country will influence equilibrium wages and interest rates across the whole union. Thus there are fiscal spillovers within a federation. Within a general class of monetary policy rules, there does not exist one that completely insulates agents in one region from fiscal policy in another. The authors contrast particular rules, such as inflation and interest rate targeting, to illustrate how monetary policy becomes a channel for fiscal policy spillovers.