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Advisor(s)
Abstract(s)
In the sequence of the recent financial and economic crisis, the recent
public debt accumulation is expected to hamper considerably business cycle
stabilization, by enlarging the budgetary consequences of the shocks.
This paper analyses how the average level of public debt in a monetary
union shapes optimal discretionary fiscal and monetary stabilization policies
and affects stabilization welfare.
We use a two-country micro-founded New-Keynesian model, where a
benevolent central bank and the fiscal authorities play discretionary policy
games under different union-average debt-constrained scenarios.
We find that high debt levels shift monetary policy assignment from
inflation to debt stabilization, making cooperation welfare superior to noncooperation.
Moreover, when average debt is too high, welfare moves directly
(inversely) with debt-to-output ratios for the union and the large
country (small country) under cooperation. However, under non-cooperation,
higher average debt levels benefit only the large country.
Description
Keywords
Asymmetric countries Monetary union Optimal fiscal and monetary policies
Citation
Publisher
Instituto Politécnico do Porto. Instituto Superior de Contabilidade e Administração do Porto