Monetary and Fiscal Unification in the EU: A Stylized Analysis

Abstract

The Economic and Monetary Union (EMU) implies a considerable change in monetary and fiscal policy design in the European Union. With the aid of a two-country version of the Alesina and Tabellini (1987) model, this paper provides a stylized analysis of monetary and fiscal policy interaction in the EMU. It is shown how macroeconomic outcomes are affected by common monetary and fiscal policies, and how outcomes depend on the commitment ability of the ECB when implementing its monetary policy. Moreover, it is analyzed how asymmetries between countries affect outcomes when entering the EMU.