The article explores how to best stabilize the economy in a two-country union when faced with mark-up shocks and price rigidities. The researchers found that optimal monetary and fiscal policies can help reduce welfare losses. Fiscal policy is used to stabilize inflation rates and terms of trade, while monetary policy remains inertial under commitment. Numerical analyses show that committing to specific policies and using fiscal stabilization can lead to significant welfare gains. Pro-cyclical fiscal rules are found to be optimal in the presence of mark-up shocks. Inertia in policy rules also contributes to welfare gains.