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Fiscal policy and regional inflation in a currency union

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  • Duarte, Margarida
  • Wolman, Alexander L.

Abstract

Substantial attention has been devoted to inflation differentials within the European Monetary Union, including suggestions that inflation differentials are a policy issue for national governments. This paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy. In a two-region general equilibrium model with traded and nontraded goods, lowering the labor income tax rate in response to positive inflation differentials succeeds in compressing inflation differentials. Such policies can lead to higher volatility of domestic inflation while leaving the volatility of real output roughly unchanged. Regional fiscal policies also have spill-over effects on the volatility of union-wide and foreign inflation in our model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 74 (2008)
Issue (Month): 2 (March)
Pages: 384-401

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Handle: RePEc:eee:inecon:v:74:y:2008:i:2:p:384-401

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Web page: http://www.elsevier.com/locate/inca/505552

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Citations

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Cited by:
  1. von Thadden, Leopold & Lipinska, Anna, 2013. "On the (In)effectiveness of Fiscal Devaluations in a Monetary Union," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80038, Verein für Socialpolitik / German Economic Association.
  2. Sandra Gomes, 2004. "Monetary Policy in a Currency Union with National Price Asymmetries," Working Papers w200416, Banco de Portugal, Economics and Research Department.
  3. Lipińska, Anna & von Thadden, Leopold, 2009. "Monetary and fiscal policy aspects of indirect tax changes in a monetary union," Working Paper Series 1097, European Central Bank.
  4. Bernardino Adão & Isabel Horta Correia, 2010. "Labor Immobility and the Transmission Mechanism of Monetary Policy in a Monetary Union," Working Papers w201019, Banco de Portugal, Economics and Research Department.
  5. Lieb Lenard, 2009. "Taking Real Rigidities Seriously: Implications for Optimal Policy Design in a Currency Union," Research Memorandum 032, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  6. Coleman, Simeon, 2012. "Where Does the Axe Fall? Inflation Dynamics and Poverty Rates: Regional and Sectoral Evidence for Ghana," World Development, Elsevier, vol. 40(12), pages 2454-2467.
  7. Filippo Altissimo & Pierpaolo Benigno & Diego Palenzuela, 2011. "Inflation Differentials in a Currency Area: Facts, Explanations and Policy," Open Economies Review, Springer, vol. 22(2), pages 189-233, April.
  8. Margarida Duarte & Alexander L. Wolman, 2003. "Fiscal policy and regional inflation in a currency union," Working Paper 03-11, Federal Reserve Bank of Richmond.
  9. Rodriguez-Palenzuela, Diego & Camba-Méndez, Gonzalo & García, Juan Angel, 2003. "Relevant economic issues concerning the optimal rate of inflation," Working Paper Series 0278, European Central Bank.
  10. Pytlarczyk, Ernest, 2005. "An estimated DSGE model for the German economy within the euro area," Discussion Paper Series 1: Economic Studies 2005,33, Deutsche Bundesbank, Research Centre.
  11. Okano, Eiji, 2014. "How important is fiscal policy cooperation in a currency union?," Journal of Economic Dynamics and Control, Elsevier, vol. 38(C), pages 266-286.
  12. Evers, Michael P., 2012. "Federal fiscal transfer rules in monetary unions," European Economic Review, Elsevier, vol. 56(3), pages 507-525.
  13. Mykhaylova, Olena, 2009. "Welfare implications of country size in a monetary union," MPRA Paper 23323, University Library of Munich, Germany.
  14. Kayam, Saime S., 2011. "Influence of institutional factors and wage-setting mechanism in a dual labour market with currency union: Northern Cyprus," MPRA Paper 39154, University Library of Munich, Germany.
  15. Margarida Duarte, 2003. "The euro and inflation divergence in Europe," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-70.

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