Rules and discretion with common central bank and separate fiscal authorities

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.