| This dissertation consists of three theoretical and empirical essays on monetary and fiscal policy. The first essay, Price Stability in a Monetary Union, analyzes the effect of interaction between monetary and fiscal policy on price stability in the context of a monetary union. The analysis uses a general equilibrium model featuring monopolistic competition and price rigidity in a two-country monetary union. As in the European Monetary Union, the monetary authority is centralized, while the fiscal authorities are decentralized. The main findings show that: (i) an equilibrium exists when only one policy is dominant; (ii) when monetary policy is dominant, it can assure price stability in the union but an equilibrium exists only when the fiscal behavior in both countries is sustainable; and (iii) when fiscal policy is dominant, the unsustainable fiscal behavior of one of the union's members affects the other member through the impact on union's prices, that are beyond the full control of monetary authority. The conclusion is that if price stability is the objective, then union members' fiscal behavior has to be constrained, in line with the fiscal criteria of the Maastricht Treaty.; The second essay, Monetary and Fiscal Policy Rules: A Welfare Comparison, follows logically from the first and identifies a monetary and fiscal policy mix that is compatible with price stability and that leads to minimal welfare loss. The model is similar to the one used before but here taxation is distortionary. The findings show that: (i) the monetary authority should follow a policy rule that aggressively targets expected inflation; (ii) fiscal policy should respond to outstanding government debt; and (iii) a fiscal rule that requires to balance the budget at all times, similar to the one prescribed in the Maastricht Treaty, is needlessly costly in terms of welfare.; The third essay, How the European Central Bank Conducts Monetary Policy, estimates the reaction function of the European Central Bank. The analysis concludes that a Taylor rule approximates the behavior of the Bank since 1999. |
