Monetary and fiscal policy separations: ‘single economy’ vs. ‘monetary union’ issues

This paper reconsiders the role of separation principles between monetary and fiscal policies which in ‘normal’ times are seen as being conducive to stable outcomes of policymaking. Such principles are discussed for both ordinary nation states (i.e. ‘single economies’, characterized by one monetary and one fiscal policy) and ‘monetary unions’ (characterized by one monetary and many fiscal policies). Because of the multiplicity of fiscal actors, monetary unions face additional coordination challenges (that are absent in single economies). In particular, the size of the coordination problem depends on the level of outstanding government debt. Moreover, the nature of the coordination problem tends to be different under regimes of monetary and fiscal dominance, depending on the exact pattern of direct and indirect fiscal spillovers between countries.