Monetary and Fiscal Policy in a Monetary Union

The idea that a common monetary policy in a monetary union imposes costs when compared with independent policies at the country level is largely widespread in the literature. This result leads directly to a greater emphasis on national Þscal policies. We show in this paper that a common monetary policy has more power to asymmetrically affect countries than is usually stated in the literature. Aggregate shocks in a union where countries are identical but specialized in different goods have asymmetric effects across countries. Should this power to affect asymmetrically countries be used by the monetary authority? The importance of Þscal policy for the answer of this question is also studied in this paper. JEL: E31; E41; E58; E62 ∗Email: [email protected]