Müller, Gernot Johannes Hettig, Thomas Mueller, Gernot
Year of Publication:
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2015: Ökonomische Entwicklung - Theorie und Politik - Session: Common Currencies F11-V3
Within currency unions, according to the pre-crises consensus, countries can rely on fiscal policy to stabilize economic activity locally. Monetary policy's role, in turn, is to stabilize economic activity at the union level. Against this background, we reassess the optimal degree of fiscal stabilization within currency union provided that monetary policy is constrained by the zero lower bound on nominal interest rates. Specifically, we contrast the optimal level of government consumption from an individual country's perspective with the optimal level from the union's perspective and explore the need for coordinating expansionary fiscal policies.