Monetary Union and Fiscal Federalism
AbstractDoes a monetary union need fiscal shock absorbers helping the participating countries to cope with asymmetric shocks? The consensus in the debate over EMU argues that the answer is yes. In this paper, we revisit the issue, building on a dynamic, general equilibrium framework of regions in a monetary union exposed to asymmetric shocks. We show that inter-regional taxes and transfers can stabilize regional employment or consumption, but not both. The welfare effects of such a stabilization are, however, ambiguous. In contrast to a popular argument in the EMU debate, inter-regional taxes and transfers do not reduce the incentives for goods and labour market deregulation in the regions, provided that the degree of trade integration among the regions is large. There is, however, reason to coordinate regional reform policies to avoid adverse effects on the aggregate performance of the union.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2615.
Date of creation: Nov 2000
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- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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