Monetary and budgetary-fiscal policy interactions in a Keynesian heterogeneous monetary union

The paper studies the effects of heterogeneity upon the monetary and fiscal-budgetary policy interactions in a Keynesian monetary union. As a result of interactions, some of our results contrast sharply with the ones in studies that consider separately monetary, fiscal and budgetary policies. Other non-conventional mechanisms are identified in connection with the supply-side effects of fiscal taxes variations. As concerns policy responses to inherited unemployment, the central bank profile proves notably to be crucial in determining the magnitude of the instrument moves that are required to achieve the objectives. Simulations suggest that heterogeneity is likely to introduce more sources of non conventional effects and to enforce adverse interactions, especially in contexts of high unemployment. However, provided authorities are able to control the distributive conflict and its inflationary consequences, it is beneficial for the union that monetary policy specializes in countering the common effects of shocks, because that pushes governments to concentrate in countering the idiosyncratic effects. Employment targets require then lower instruments responses, as a result of efficiency gains.