Is Fiscal Policy Coordination in EMU Desirable?

IMF Working Papers, November 1, 2001

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Is Fiscal Policy Coordination in EMU Desirable?

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Bibliographic details

• Authors: Roel M. W. J. Beetsma, Xavier Debrun, Franc Klaassen
• Published: November 1, 2001
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451858952.001

Summary findings

• A unified European monetary policy motivates consideration of international fiscal coordination from the perspective of macroeconomic stabilization.
• A simple model identifies when coordination may be desirable:
  • Coordination is beneficial when the cross-country correlation of the shocks is low.
  • Coordination is likely counterproductive when demand or supply shocks are highly symmetric across countries and governments cannot acquire a strategic leadership position vis-à-vis the ECB.
• Potential adverse reactions by the ECB can arise from:
  • Free-riding by fiscal authorities.
  • A conflict on the orientation of the policy mix between fiscal authorities and the ECB.

Model insights and scenarios

• Primary criterion for beneficial coordination:
  • Low cross-country correlation of shocks favors fiscal coordination.
• Adverse-case scenario:
  • High symmetry of demand or supply shocks across countries combined with absence of strategic fiscal leadership leads to counterproductive outcomes due to ECB reactions.

Policy implications and considerations

• Fiscal coordination should be evaluated against:
  • The degree of shock correlation across EMU countries.
  • The likely strategic interaction between fiscal authorities and the ECB, including risks of free-riding and policy-mix conflict.
• Effective coordination may require mechanisms that:
  • Mitigate adverse ECB responses.
  • Enable a credible leadership position for fiscal authorities when needed.

Key facts and metadata (preserved exactly)

• Authors: Roel M. W. J. Beetsma, Xavier Debrun, Franc Klaassen
• Date: November 1, 2001
• Pages: 46
• Volume: 2001
• Issue: 178
• Series: Working Paper No. 2001/178
• DOI: https://doi.org/10.5089/9781451858952.001
• Stock No: WPIEA1782001
• ISBN: 9781451858952
• ISSN: 1018-5941
• Subject keywords: Economic theory, Financial services, Fiscal policy, Fiscal stance, Inflation, Price stabilization, Prices, Real interest rates, Supply shocks

IMF Working Paper No. 2001/178 (Beetsma, Debrun, Klaassen), November 1, 2001.

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