Séverine Menguy

Correspondence: Séverine Menguy, severine.menguy@orange.fr

Université Paris Descartes, France

pdf (1265.7 Kb) | doi:

Abstract

In case of productivity or taxation rates shocks, monetary policy can perfectly stabilize average variables in all the monetary union when the Zero Lower Bound is not binding. So, the national budgetary policy should only stabilize asymmetric shocks and the differential of these idiosyncratic shocks with their average values in all the monetary union. On the contrary, when the ZLB is binding, monetary policy loses its efficiency to stabilize average shocks in all the monetary union. Budgetary policies should then be expansionary, in order to reduce the recessionary and deflationary tensions due to symmetric positive productivity shocks or to declines in average taxation rates in all member countries. The national budgetary policy should be more active, in order to stabilize not only differentials in the persistence of shocks between the national country and the rest of the monetary union, but also average global shocks. Therefore, budgetary policies could be more useful in a ZLB framework, provided they are not constrained by the fiscal situation and the indebtedness level of the national country.

Keywords:

  New-Keynesian models, budgetary policy, monetary policy, Zero Lower Bound, monetary union

References

Adam K. and R.M. Billi (2006) Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates. Journal of Money, Credit and Banking, vol.38, n°7: 1877-1905.

Adam K. and R.M. Billi (2007) Discretionary Monetary Policy and the Zero Lower Bound on Nominal Interest Rates. Journal of Monetary Economics, vol.54, n°3, April: 728-752.

Beetsma R.M.W.J. and H. Jensen (2005) Monetary and Fiscal Policy Interactions in a Micro-founded Model of a Monetary Union. Journal of International Economics, vol.67, n°2: 320–352.

Benigno P. and M. Woodford (2003) Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach. NBER Working Paper, 9905.

Bilbiie F. O., T. Monacelli and R. Perotti (2014) Is Government Spending at the Zero Lower Bound Desirable?. NBER Working Paper, n°20687.

Burgert M. and S. Schmidt (2014) Dealing with a Liquidity Trap when Government Debt matters: Optimal Time-consistent Monetary and Fiscal Policy. Journal of Economic Dynamics and Control, 47: 282–299.

Christiano L., M. Eichenbaum and S. Rebelo (2011) When is the Government Spending Multiplier Large?. Journal of Political Economy, vol.119, n°1: 78-121.

Clarida R., J. Galí and M. Gertler (1999) The Science of Monetary Policy: A New-Keynesian Perspective. Journal of Economic Literature, vol.37, n°4, December: 1661-1707.

Clarida R., J. Gali and M. Gertler (2001) Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach. American Economic Review, vol.91, 2: 248-252.

Colciago A., T. Ropele, V. A. Muscatelli and P. Tirelli (2008) The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?. Review of International Economics, vol.16, n°3, August: 591–610.

Cook D. and M. B. Devereux (2011) Optimal Fiscal Policy in a World Liquidity Trap. European Economic Review, vol.55, n°4: 443-462.

Correia I., E. Farhi, J. P. Nicolini and P. Teles (2013) Unconventional Fiscal Policy at the Zero Bound. American Economic Review, vol.103, n°4, June: 1172:1211.

Eggertsson G. B. (2006) The Deflation Bias and Committing to Being Irresponsible. Journal of Money, Credit, and Banking, 38: 283-321.

Eggertsson G. B. (2009) What Fiscal Policy is Effective at Zero Interest Rates?. Federal Reserve Bank of New York, Staff Report n°402, New York.

Eggertsson G. B. and M. Woodford (2003) The Zero Bound on Interest Rates and Optimal Monetary Policy. Brookings Papers on Economic Activity, n°1: 139-233.

Eggertsson G. B. and M. Woodford (2004) Optimal Monetary and Fiscal Policy in a Liquidity Trap. NBER Working Paper, n°10840, October.

Erceg C. and J. Linde (2014) Is There a Fiscal Free Lunch in a Liquidity Trap. Journal of European Economic Association, 12: 73-107.

Ferrero A. (2009) Fiscal and Monetary Rules for a Currency Union. Journal of International Economics, vol.77, n°1: 1-10.

Galí J. (2008) Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. Princeton: Princeton University Press.

Gali J. and T. Monacelli (2005) Monetary Policy and Exchange Rate Volatility in a Small Open Economy. Review of Economic Studies, n°72: 707-734.

Gali J. and T. Monacelli (2008) Optimal Monetary and Fiscal Policy in a Currency Union. Journal of International Economics, vol.76, n°1: 116–132.

Ganelli G. (2003) Useful Government Spending, Direct Crowding-out and Fiscal Policy Interdependence. Journal of International Money and Finance, vol.22, n°1, February: 87-103.

Jung T., Y. Teranishi and T. Watanabe (2005) Optimal Monetary Policy at the Zero-Interest-Rate Bound. Journal of Money, Credit, and Banking, vol.37, n°5: 813-835.

Leith C. and J. Malley (2002) Estimated Open Economy New Keynesian Phillips Curves for the G7. CESifo Working Papers, n°699.

Matveev D. (2014) Time-Consistent Management of a Liquidity Trap: Monetary and Fiscal Policy with Debt. Working Paper.

Mertens K. and M. O. Ravn (2014) Fiscal Policy in an Expectations Driven Liquidity Trap. Review of Economic Studies, vol.81, n°4: 1637-1667.

McCallum B. T. (2000) Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates. Journal of Money, Credit, and Banking, 32: 870-904.

Monacelli T. (2005) Monetary Policy in a Low Pass-Through Environment. Journal of Money, Credit and Banking, vol.37, n°6: 1048–1066.

Muscatelli A., P. Tirelli and C. Trecroci (2003) The Interaction of Fiscal and Monetary Policies: Some Evidence using Structural Models. CESifo Working Paper n°1060, Journal of Macroeconomics.

Nakata T. (2015) Optimal Government Spending at the Zero Bound: Non Linear and Non Ricardian Analysis. Finance and Economics Discussion Series, 2015-038, Board of Governors of the Federal System (US).

Nakov A. (2008) Optimal and Simple Monetary Policy Rules with Zero Floor on the Nominal Interest Rate. International Journal of Central Banking, vol.4, n°2, June: 73-128.

Schmidt S. (2013) Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates. Journal of Money, Credit and Banking, vol.45, n°7, October: 1335–1350.

Stähler N. and C. Thomas (2011) FIMOD – A DSGE Model for Fiscal Policy Simulation. Working Paper, n°1110, Banco de Espana.

Werning I. (2011) Managing a Liquidity Trap: Monetary and Fiscal Policy. NBER Working Paper, n°17344.

Woodford M. (2011) Simple Analytics of the Government Expenditure Multiplier. American Economic Journal: Macroeconomics, 3: 1-35.

Woodford M. (2003) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton: Princeton University Press.