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The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?

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  • Andrea Colciago
  • Anton Muscatelli
  • Tiziano Ropele
  • Patrizio Tirelli

Abstract

We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DGE model which incorporates non-Ricardian consumers (as in Galì et al. 2004) and a home bias in the composition of national consumption bundles. We find that fiscal policies stabilize the aggregate economy but, in some cases, generate conflicting views among national policymakers. Finally, model determinacy requires that national fiscal feedbacks on debt accumulation be designed with reference to the debt dynamics of the entire monetary union. This is in sharp contrast with the "Brussels consensus" based on the view that the ECB alone should stabilize the union-wide economy and national fiscal policies should react to idiosyncratic shocks and to national debt levels.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1682.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1682

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  7. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
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  20. Patrizio Tirelli & V. Anton Muscatelli & Carmine Trecroci, 2004. "The interaction of fiscal and monetary policies: some evidence using structural econometric models'," Money Macro and Finance (MMF) Research Group Conference 2003 103, Money Macro and Finance Research Group.
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Citations

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Cited by:
  1. Stähler, Nikolai & Thomas, Carlos, 2011. "FiMod - a DSGE model for fiscal policy simulations," Discussion Paper Series 1: Economic Studies 2011,06, Deutsche Bundesbank, Research Centre.
  2. Andrea Colciago, 2006. "Sticky wages and rule of thumb consumers," Working Papers 98, University of Milano-Bicocca, Department of Economics, revised Sep 2006.
  3. Iulia Siedschlag, 2008. "Macroeconomic Differentials and Adjustment in the Euro Area," SUERF Studies, SUERF - The European Money and Finance Forum, number 2008/3 edited by Morten Balling.
  4. Philipp Engler & Simon Voigts, 2013. "A Transfer Mechanism for a Monetary Union," SFB 649 Discussion Papers SFB649DP2013-013, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Hüseyin SEN & Ayse KAYA, 2013. "The Role of Taxes as an Automatic Stabilizer: Evidence from Turkey," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 43(3), pages 303-313, December.
  6. Costa Junior, Celso Jose & Sampaio, Armando Vaz & Gonçalves, Flávio de Oliveria, 2012. "Income Transfer as Model of Economic Growth," MPRA Paper 45494, University Library of Munich, Germany.
  7. Federico Etro & Andrea Colciago, 2007. "Endogenous Market Structure and the Business Cycle," Working Papers 126, University of Milano-Bicocca, Department of Economics, revised Nov 2007.
  8. Barrett, Alan & Bergin, Adele & FitzGerald, John & Traistaru-Siedschlag, Iulia, 2006. "Economic Assessment of the Euro Area: Forecasts and Policy Analysis, Autumn Report 2006," Research Series, Economic and Social Research Institute (ESRI), number sustat22.
  9. Costa Junior, Celso José & Sampaio, Armando Vaz, 2014. "Tax Reduction Policies of the Productive Sector and Its Impacts on Brazilian Economy," Dynare Working Papers 36, CEPREMAP.

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