Comments on Mark-up fluctuations and fiscal policy stabilization in a monetary union
The R. Beetsma and H. Jensen paper––i.e. henceforth BJ––studies the interaction between monetary and fiscal policies for a microfounded model with two-regions sharing one currency. The authors focus on the question to as whether national fiscal policy should conduct stabilization policies to increase business cycle correlations. The two regions model features monopolistic competition and sticky prices à la Calvo. Those assumptions give rise to a “New Keynesian” Phillips curve with inflation expectations. The modeling novelty of the paper resides in the introduction of the fiscal government expenditure in the utility function of the agents. It is assumed that the national fiscal authorities optimally choose government expenditure.