Short and medium run effects of fiscal policy in an economic and monetary union : the case of a small country

Abstract

We analyze the effectiveness of fiscal policy in an economic and monetary union. On the basis of a simple static and dynamic Mundell-Fleming model, we show that expansionary fiscal policy is very effective in the short run, but in the medium run all positive effects are "exported" abroad due to impaired competitiveness. These results are illustrated by numerical simulations. High short-run effectiveness of fiscal policy may have contributed to excessive deficits in many EMU countries. (original abstract)