Fiscal policy coordination in the EMU

The objective of this article is to compare the outcomes of fiscal coordination under a narrow and a broad agenda in the European Monetary Union (EMU). The EMU (narrow) approach to fiscal coordination will lead to higher volatility of interest rates, output, inflation and average budget deficits than broad coordination. Further, fiscal authorities will prefer a broad type of coordination, although there will be incentives to deviate. Hence, to promote broad coordination in a monetary union like the EMU clear rules indicating how to operate and an effective forum to encourage dialogue should be put into place.