Cooperative Monetary and Fiscal Policies in the Euro Area
Abstract This article discusses the interaction of fiscal and monetary policy in the euro area. Though many observers suggest a fiscal union as the next step of euro‐area constitutional reform, a federal fiscal union does not appear politically feasible in the short run. We suggest moving forward with cooperative monetary and fiscal institutions and policies that allow for decentralized fiscal decisions, while taking federal stabilization policies into account. This approach will increase the probability of survival of the euro area compared with the current fiscal arrangements. Using a dynamic macro model, counterfactual simulation paths of our cooperative solution are contrasted with time‐series data for the euro area.
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