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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Macroeconomic Stabilization through Monetary and Fiscal Policy Coordination: Implications for European Monetary Union
Jay H. Bryson
1993-453  (September 1993)

Abstract:  In a two-country model, we consider the implications of monetary and fiscal policy coordination for macroeconomic stabilization. We show that the optimal regime is one of monetary and fiscal policy coordination under flexible exchange rates. In the context of the European Community, this suggests that the desire to fix exchange rates may not be costless. In addition, we show that, under an asymmetric demand shock, fiscal coordination requires a relatively high degree of flexibility in fiscal policy. This suggests that limits on the flexibility of fiscal policies, as suggested in the Delors Report, may hinder macroeconomic stabilization.

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