Monetary and Fiscal Policy Coordination and Macroeconomic Stabilization. A Theoretical Analysis

37 Pages Posted: 23 Apr 2003

See all articles by Luca Lambertini

Luca Lambertini

University of Bologna - Department of Economics

Riccardo Rovelli

University of Bologna - Department of Economics; IZA Institute of Labor Economics

Date Written: April 4, 2003

Abstract

We examine the relations between monetary and fiscal policies in the process of macroeconomic stabilization. Our model suggests that each policy maker prefers to be the second mover in a "Stackelberg" situation, i.e. where one policy makers precommits its policy choice. At the same time, both Stackelberg solutions are preferable, for each policymaker, to the Nash solution. We argue that there is a natural way to choose among the two Stackelberg games, and that accordingly the government should act as the leader and adopt a fiscal policy rule based on the minimization of a loss function, which internalizes also the objective of price stability. This solution mirrors existing institutional arrangements, where fiscal policy decisions are typically taken before and less frequently than monetary policy decisions. We interpret our results in relation to the debate on monetary-fiscal coordination in EMU and on the role of the Stability and Growth Pact. We argue that a coordination mechanism along the lines of the Broad Economic Policy Guidelines is desirable.

Keywords: Monetary Policy, Fiscal Policy, Policy Coordination, EMU, Stability and Growth Pact

JEL Classification: E520, E610, E630, H700

Suggested Citation

Lambertini, Luca and Rovelli, Riccardo, Monetary and Fiscal Policy Coordination and Macroeconomic Stabilization. A Theoretical Analysis (April 4, 2003). Available at SSRN: https://ssrn.com/abstract=380322 or http://dx.doi.org/10.2139/ssrn.380322

Luca Lambertini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Riccardo Rovelli (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 2092 601 (Phone)
+39 051 6402 664 (Fax)

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
926
Abstract Views
3,902
rank
30,899
PlumX Metrics