Fiscal Policy, Monetary Regimes and Current Account Dynamics

19 Pages Posted: 24 Jan 2013

See all articles by Bernhard Herz

Bernhard Herz

University of Bayreuth

Stefan Hohberger

European Union - JRC-Ispra, European Commision; University of Bayreuth - Faculty of Law, Business and Economics; University of Bayreuth

Date Written: February 2013

Abstract

For the individual European Monetary Union (EMU) members fiscal policy has gained in importance owing to the loss of monetary policy as an autonomous policy instrument. Based on a small open economy dynamic stochastic general equilibrium (DSGE) model with fiscal feedback rules, we analyze the dynamic macroeconomic response in particular of the current account under alternative exchange rate regimes. Our results indicate that entry into monetary union makes the economy more vulnerable to a productivity shock and leads to higher variability of the current account. For a risk premium shock, an entry into EMU implies lower variability of most macroeconomic variables, but a higher persistence in the adjustment process of the current account. For both shocks, a countercyclical fiscal response to the current account is more stabilizing for most macroeconomic variables than a conventional countercyclical response to output. Stabilizing the current account comes at the price of higher variability of output in the short‐run, however.

Suggested Citation

Herz, Bernhard and Hohberger, Stefan, Fiscal Policy, Monetary Regimes and Current Account Dynamics (February 2013). Review of International Economics, Vol. 21, Issue 1, pp. 118-136, 2013, Available at SSRN: https://ssrn.com/abstract=2206169 or http://dx.doi.org/10.1111/roie.12024

Bernhard Herz (Contact Author)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Stefan Hohberger

European Union - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

University of Bayreuth - Faculty of Law, Business and Economics ( email )

Universitätsstraße 30
Bayreuth, 95447
Germany

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1
Abstract Views
620
PlumX Metrics