FISCAL-POLICY COORDINATION AND FLEXIBILITY UNDER EUROPEAN-MONETARY-UNION - IMPLICATIONS FOR MACROECONOMIC STABILIZATION

Some writers have proposed that under European Monetary Union (EMU) fiscal policies should be coordinated to reduce the degree of fiscal activism required for macroeconomic stabilization. We show that, in theory, fiscal policy coordination indeed may lower the degree of fiscal flexibility needed to stabilize a common supply shock. However, fiscal policy coordination may raise the degree of fiscal flexibility needed to stabilize an asymmetric demand shock. These theoretical findings are supported by simulations performed with the multi-country model of the Federal Reserve Board. The results suggest that fiscal policy coordination under EMU may require more fiscal activism rather than less.