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Federal fiscal transfer rules in monetary unions

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  • Evers, Michael P.

Abstract

This paper considers simple rules for federal fiscal transfers that automatically redistribute funds among member states of a monetary union to counteract adverse idiosyncratic shocks. The transfer rules target regional differences in nominal GDP, consumption spending, labor income, and fiscal deficits. Targeting regional fiscal deficits is the only rule that reduces consumption fluctuations and that promotes interregional consumption risk sharing, but the overall welfare effect is negative. In contrast, targeting regional differences in labor income yields the largest welfare gains, but it also yields the largest fluctuations in consumption and real GDP. It is demonstrated that the welfare gains primarily stem from reducing the allocative inefficiency of input factors caused by nominal rigidities. The optimal transfer rule essentially implies a combination of consumption spending and labor income targeting, and it primarily targets the allocative inefficiency of factor inputs at the cost of lower interregional consumption risk sharing.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 3 ()
Pages: 507-525

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:507-525

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Web page: http://www.elsevier.com/locate/eer

Related research

Keywords: Macro aspects of fiscal federalism; Monetary union; Stabilization; Interregional risk sharing;

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Citations

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Cited by:
  1. Engler, Philipp & Voigts, Simon, 2013. "A transfer mechanism for a monetary union," Discussion Papers 2013/2, Free University Berlin, School of Business & Economics.
  2. Andrea Bonilla Bolanos, 2012. "External vulnerabilities and economic integration. Is the Union of South American Nations a promising project?," Working Papers 1238, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2013. "Fiscal integration in the eurozone: Economic effects of two key scenarios," ZEW Discussion Papers 13-106, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Dmitriev, Mikhail & Hoddenbagh, Jonathan, 2012. "The optimal design of a fiscal union," MPRA Paper 46007, University Library of Munich, Germany, revised Apr 2013.

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