Template-Type: ReDIF-Paper 1.0


Author-Name:  Lukas Vogel
Author-X-Name-First: Lukas
Author-X-Name-Last: Vogel

Author-Name:  Werner Roeger
Author-X-Name-First: Werner
Author-X-Name-Last: Roeger

Author-Name:  Bernhard Herz
Author-X-Name-First: Bernhard
Author-X-Name-Last: Herz


Title: Optimal Simple Rules for Fiscal Policy in a Monetary Union
Abstract: The paper discusses the stabilizing potential of fiscal policy in a dynamic general-equilibrium model of monetary union. We consider a small open economy inside the currency area. We analyze the demand and supply effects of direct taxation, indirect taxation and government spending and derive optimal simple rules for fiscal stabilization of a technology shock. Fiscal policy achieves substantial macroeconomic stabilization. Simple public-expenditure rules show the highest degree of both output and inflation stabilization. The implementation lag substantially weakens output stabilization, but hardly affects the stabilization of prices. Out-put-oriented rules imply less instrument inertia than inflation-dominated rules. The implemen-tation lag leads to higher coefficients for inflation relative to output in the optimal rule. Com-pared to the single-instrument approach the simultaneous optimization of two instrument rules implies only little additional stabilization gains.
Length:  39 pages
Creation-Date:  2006-12
File-URL: http://www.bgpe.de/texte/DP/021_vogel_roeger_herz.pdf
File-Format: Application/pdf
File-Function: First version, 2006
Number: 021
Classification-JEL: E37, E62, F41
Keywords: Fiscal policy, monetary union, simple policy rules
Handle: RePEc:bav:wpaper:020_vogel_roeger_herz