Symbiosis of Monetary and Fiscal Policies in a Monetary Union
We consider the interaction between the monetary policy in a monetary union, and separate fiscal policies of the member countries. We use a Barro-Gordon type model extended to many countries and fiscal policies. Each country's fiscal policies inflict externalities on other countries, and the common monetary policy has its time- consistency problem. But if the two types of policymakers agree about the ideal levels of output and in ation, then this ideal is attained despite disagreements about the weights of the objectives, despite ex post monetary accommodation to fiscal profliigacy, without fiscal coordination, without monetary commitment, and for any order of moves.