قوانین و صلاحدید مشترک با بانک مرکزی و مقامات مالی جداگانه

This paper evaluates the implications of international policy coordination under the setting of a common monetary authority and separate fiscal authorities. The paper considers a two-country framework with noncoordinated monetary and fiscal policies. The deviations of output, public expenditure, and inflation from target levels are obtained under symmetric and asymmetric regimes of rules and discretion. The expressions for output, inflation, and government expenditure deviation from target are also obtained under coordinating fiscal authorities and compared with similar expressions under insular fiscal policy making.

The aim of this paper is to evaluate fiscal and monetary policy implications of a monetary union composed of two countries, with separate fiscal authorities. The Maastricht Accord has no provision for a single fiscal policy to complement the single monetary policy. Fiscal policy will remain in the hands of the national governments. Their individual and uncoordinated actions could make a large difference not only to the fiscal stance of the union as a whole, but also the macroeconomic performances e.g. the inflation performance. The analysis in this paper considers the effects on inflation, output and government expenditure when the common monetary authority chooses a composite inflation rate for the two countries, the fiscal authorities choose the tax rates for their respective countries, and monetary policy is jointly and centrally managed. In the benchmark model, the monetary policy for the two countries is placed under a single monetary authority. This authority aims to achieve both countries’ goals and is responsible for defining the monetary policy for the union. A two-country framework with a common monetary authority but separate fiscal authorities is considered. In the model, the fiscal authorities choose the taxes for each country. The monetary authority chooses a composite inflation rate, which is a weighted average of the endogenously determined inflation rates in the two countries. The implicit inflation rates are defined as the change in price levels in each country, with the previous year’s price level normalized to zero. It is assumed that the monetary and fiscal authorities do not cooperate in their choice of inflation and tax rates. The monetary authority chooses the inflation rate that minimizes its loss. Similarly, each fiscal authority chooses the level of taxes that minimizes its own loss. Each nation’s loss is represented as a weighted sum of squared deviations of inflation, output and public expenditure from their target levels. The expressions for the composite inflation, public expenditure and output are obtained. The following cases are considered below: 1. Discretion, in which monetary and fiscal authorities do not commit to the private sectors and thus act on their own discretion. 2. Commitment, in which the monetary and fiscal authorities make binding commitments to the private sector. 3. Monetary authority is discretionary, while the fiscal authorities act in a committed manner. 4. Monetary authority commits, while the fiscal authorities act in a discretionary manner. 5. The monetary authority and a fiscal authority are committed, while the other fiscal authority is discretionary. The model under consideration in this paper is a blend of Bryson, Jensen, and VanHoose (1993) and Duca and VanHoose (1990). In this paper, a common monetary authority sets a composite inflation rate. In contrast, Bryson et al. consider separate monetary authorities in each country which set inflation rates in their respective countries. My model assumes that a common monetary authority has been established. Thus, the fiscal authorities consider a common inflation rate in their respective budget constraints. As a result, the government budget constraints are a modified version of the budget constraint represented by Alesina and Tabellini (1987). In the Alesina and Tabellini case, the government budget is financed by direct taxes and the entire amount of money seigniorage in each country. In my model, each country’s budget is financed from direct taxes and from the fraction of the common money seigniorage available to each country. Article 103 of the Maastricht Treaty instructs members to “coordinate (their economic policies) within the Council (of ministers).” This aspect of the Treaty is represented by the fiscal coordination scenario in the paper, whereby the fiscal authorities coordinate their choice of tax rates to minimize the joint social loss function for both countries. The European Council will monitor developments in member countries and make recommendations to national governments when the latter’s policies deviate from the guidelines. If countries do not respond to the directives, the Council may recommend that the European Investment Bank stop lending to the country, require it to make noninterest bearing deposits with the Community and impose fines. The Stability and Growth pact, (1995), emphasizes the importance of maintaining sound government budgetary discipline as a means to strengthening the conditions for price stability and strong sustainable growth conducive to employment creation. The rules of the stability pact were aimed at keeping the budget deficits within 3% of GDP. According to the “excessive deficits” criteria, sanctions and fines would be imposed on member countries violating the 3% deficits to GDP criterion. In the context of my model, this corresponds to a situation in which the fiscal authorities act in a committed fashion and adhere to rules regarding the tax rates imposed in their respective countries. The temptation to use monetary policy for short-term gains in employment or reductions in real value of government debt causes credibility problems vis-a-vis the private sector. This situation is represented by the monetary discretion scenario in the model developed in the paper. On the other hand, the central bank could be made independent of the government and the electorate and be given a reward for maintaining price stability. The monetary commitment scenario considered in the paper reflects the realization of this outcome. Allan Drazen (1989) shows that free capital markets and inflation convergence would force the European countries to restructure their tax revenue base, replacing inflation taxes with more direct taxes. My paper considers a tax effect and seigniorage effect, which reveals the likely impact on government spending. The paper is organized as follows. The two-country framework with a common monetary authority is presented in section II. In section III.A and III.B, the solutions for inflation, output and public expenditure deviations under symmetric and asymmetric scenarios of rules and discretion are analyzed, respectively. This reveals the interactions among fiscal distortions and monetary and fiscal policy time-inconsistencies in a two-country monetary union. Section IV deals with the scenarios of rules and discretion under fiscal coordination. Concluding observations are made in section V.

Previous literature on international policy coordination has considered monetary and fiscal coordination issues separately. Rogoff (1985) and Canzoneri and Henderson (1988) analyzed monetary policy coordination, but not fiscal policy coordination. Tabellini (1990) considered fiscal policy coordination, but did not address monetary policy coordination. Alesina and Tabellini (1987) consider a closed economy framework and find that when monetary and fiscal policies are not coordinated, a monetary regime with commitment does not necessarily improve welfare. VanHoose (1992) considers the effects on aggregate economic variables and welfare in the European Monetary System due to the use of monetary rules or discretion by the centralized policy making authorities. Bryson et al. (1993) evaluated the effects of international policy coordination in an environment in which both monetary and fiscal policy making are endogenous and are affected by time inconsistencies. They conducted their analysis in a two country framework with separate monetary and fiscal authorities in each country. In this paper, I have analyzed the effects of policy making in a two country framework with separate fiscal authorities and a common monetary authority. The reduced form solutions for output, inflation, and government spending have been compared under different scenarios of rules and discretion. The degree of market integration has effects on macroeconomic variables under the scenarios of rules and discretion. A higher degree of market integration results in higher output and inflation, but lower government spending under all the scenarios. The higher seigniorage revenues obtained result in lower taxes and higher output with increased market integration. The lower taxes outweigh the higher seigniorage revenues, and therefore government spending is seen to be lower. The effects of the coefficient beta, which provides a fraction of the home country output consumed by home workers, also affects the macroeconomic variables uniformly across the different scenarios of rules and discretion. A higher value of beta increases output, and government spending under all the scenarios. The effects of beta on the overall inflation rate remain ambiguous. A movement from monetary and fiscal discretion to monetary and fiscal commitment results in lower inflation and higher public expenditure at the expense of lower output. The discretionary monetary authority is able to choose an inflation rate higher than that expected by the private sector. The committed monetary authority cannot deviate from its announced inflation rate. The discretionary fiscal authority can make unanticipated tax cuts to increase output, while committed fiscal authorities cannot deviate from its announced tax rates. Taxes are higher under fiscal commitment, and as a result output is lower compared to the discretionary scenario. Seigniorage revenues are higher under monetary discretion. Government spending is financed partly from taxes and partly from the seigniorage revenues. The tax effect dominates the seigniorage effect, and so the government expenditure under commitment is higher than that under discretion. A transition from monetary and fiscal discretion to an asymmetric scenario of monetary commitment and fiscal discretion results in lower inflation at the expense of lower output and public expenditure. Seigniorage revenues are higher under monetary discretion. Taxes are lower under monetary and fiscal discretion compared to monetary commitment and fiscal discretion. The seigniorage effect dominates the tax effect in the transition between the scenarios of fiscal discretion. As a result, government spending is higher under monetary and fiscal discretion. A shift from monetary and fiscal discretion to monetary discretion and fiscal commitment is associated with lower inflation and higher government spending at the expense of lower output. Taxes are lower under fiscal discretion. The seigniorage revenues are higher in the monetary and fiscal discretion scenario. The tax effect dominates the seigniorage effect, and therefore government spending is higher under monetary discretion and fiscal commitment. Considering transitions from the other symmetric scenario of monetary and fiscal commitment to the two asymmetric scenarios yields the following results. A movement from monetary and fiscal commitment to monetary commitment and fiscal discretion results in higher output at the expense of higher inflation and lower government expenditure. Taxes are lower under fiscal discretion compared to fiscal commitment. The lower taxes under fiscal discretion are compensated by higher inflation under monetary commitment and fiscal discretion. The tax effect dominates the seigniorage effect. This results in higher government spending under monetary and fiscal commitment. A shift from monetary and fiscal commitment to monetary discretion and fiscal commitment results in higher output and government expenditure at the expense of higher inflation. Seigniorage revenues are higher under a discretionary monetary authority. Taxes are higher under monetary and fiscal commitment to compensate for the lower seigniorage revenues. The seigniorage effect dominates the tax effect in the comparison between the two scenarios of fiscal commitment. As a result, government spending is higher under monetary discretion and fiscal commitment. It may be noted that in spite of the commitment by the common central bank, the common inflation rate can be high if one country’s fiscal authority is discretionary while the other country’s fiscal authority acts in a committed manner. The common inflation rate under asymmetric fiscal policy making by the countries would be higher than the symmetric fiscal scenarios in which both countries’ fiscal authorities act in a similar fashion. This may be interesting in the context of the European Monetary Union in which the European Central Bank could commit to a low inflation. However, the common inflation may be high due to discretionary and committed policy making by the different fiscal authorities of the member countries. Comparing the relative sizes of output, inflation and government expenditure under the symmetric and asymmetric scenarios of rules and discretion, the following results are obtained. Output is highest under a regime of monetary and fiscal discretion (MFD) and lowest under monetary and fiscal commitment (MFC). Similarly, inflation is highest under MFD and lowest under MFC. Government expenditure is lowest under monetary commitment and fiscal discretion, (MCFD). The intuition behind the comparative effects of fiscal coordination and insular fiscal policies under commitment and discretion has been elaborated in the concluding portion of section IV. This situation may be interesting in the context of insular and possible coordinated fiscal policies by the member countries’ fiscal authorities under the European Monetary Union. The level of national output is higher under coordinating fiscal authorities compared to insular fiscal policy making. Taxes are lower under fiscal coordination, and this results in higher national output. As taxes are lower under coordinating fiscal authorities, seigniorage revenues and the level of inflation rate may be higher under fiscal coordination.