DP4790 | Monetary and Fiscal policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve

Publication Date

23/12/2004

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Abstract

In this Paper we carry over a static version of a New Keynesian Macromodel a la Clarida Gali Gertler (1999) to a monetary union. We will show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents that national real interest rates can drive a wedge between macroeconomic outcomes across member states. In particular small countries are vulnerable and therefore in need of fiscal policy as an independent stabilization agent with room to breath.