We lay out a tractable model for ...scal and monetary policy analysis in a currency union, and study its implications for the optimal design of such policies. Monetary policy is conducted by a common central bank, which sets the interest rate for the union as a whole. Fiscal policy is implemented at the country level, through the choice of government spending. The model incorporates country-speci...c shocks and nominal rigidities. Under our assumptions, the optimal policy requires that in

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... be stabilized at the union level by the common central bank. On the other hand, the relinquishment of an independent monetary policy, coupled with nominal price rigidities, generates a stabilization role for ...scal policy, one beyond the e¢ cient provision of public goods. Interestingly, the stabilizing role for ...scal policy is shown to be desirable not only from the viewpoint of each individual country, but also from that of the union as a whole