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STABILIZING MACROECONOMIC FLUCTUATIONS IN THE EMU

Published online by Cambridge University Press:  02 March 2001

Bas Van Aarle
Bas Van Aarle
Affiliation:
University of Leuven and University of Nijmegen
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Abstract

Macroeconomic performance in the Economic and Monetary union (EMU) will be impaired if national fiscal policy flexibility and monetary flexibility of the ECB is limited, goods markets adjust sluggishly, labor mobility is low, and automatic stabilization from federal taxes and government spending is low. This paper analyzes the stabilization of output fluctuations induced by symmetric and asymmetric macroeconomic shocks in the EMU. It is shown how national fiscal flexibility and flexibility of the monetary policy of the ECB can stabilize fluctuations of the average EU business cycle that are generated by symmetric shocks. Furthermore, it is demonstrated how, under EMU, national fiscal flexibility and a system of fiscal transfers are able to stabilize differences in national business cycles that are generated by asymmetric shocks.

Keywords

Monetary and Fiscal PolicyEMUECBFiscal Transfers
Type
Research Article
Information
Macroeconomic Dynamics , Volume 5 , Issue 1 , February 2001 , pp. 56 - 80
Copyright
© 2001 Cambridge University Press

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