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Fiscal policy and regional inflation in a currency union

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Duarte, Margarida
Wolman, Alexander L.

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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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Publisher 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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  3. Roel M.W.J. Beetsma & Henrik Jensen, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 166, European Central Bank. [Downloadable!]
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  16. Chari, V V & Kehoe, Patrick J & McGrattan, Ellen R, 2002. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," Review of Economic Studies, Blackwell Publishing, vol. 69(3), pages 533-63, July.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Margarida Duarte, 2003. "The euro and inflation divergence in Europe," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 53-70. [Downloadable!]
  2. 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. [Downloadable!]
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