Policy Spillovers and Synergies in a Monetary Union
by Óscar Arce, Samuel Hurtado and Carlos Thomas
Banco de España
We provide a general equilibrium framework for analyzing the effects of supply- and demand-side policies, and the potential synergies between them, in an asymmetric monetary
union that faces a liquidity trap and a slow deleveraging process in its "periphery." We find that the joint implementation of pro-competition structural reforms in the periphery, a
fiscal expansion in the "core," and forward guidance about the future path of nominal interest rates produces positive synergies between the three policies: forward guidance reinforces the
expansionary effects of country-specific policies, and the latter in turn improve the effectiveness of forward guidance. Our results provide a case for complementing current unconventional
monetary stimuli in the euro area with national efforts on the structural reform and fiscal fronts.
JEL Codes: E44, E63, D42.
Full article (PDF, 59 pages, 5836 kb)
Discussion by Andrea Ferrero