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Fiscal and monetary policy in the enlarged European Union

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  • Pogorelec, Sabina
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    Abstract

    I build a quantitative two-country DSGE model of the European Union (EU) and investigate whether there are welfare gains from fiscal policy cooperation between the new EU members and the euro area (EMU). Fiscal cooperation is defined in terms of joint maximization of the weighted average of households’ welfare. I find that fiscal policy cooperation is welfare-reducing for both groups of countries. This result depends on a realistic assumption about the presence of foreign ownership of firms in the new EU countries. When there is no foreign ownership in the new EU countries, the euro area is indifferent between cooperating and not cooperating, but the new EU members still prefer not to cooperate with EMU in terms of fiscal policy. JEL Classification: E63, F42

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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 0655.

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    Date of creation: Jul 2006
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    Handle: RePEc:ecb:ecbwps:20060655

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    Keywords: Central and Eastern European Countries; Enlarged European Union; Fiscal policy cooperation; Fiscal-monetary interactions; Foreign ownership of firms;

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    Cited by:
    1. Matthew Canzoneri, 2007. "Coordination of Monetary and Fiscal Policy in a Monetary Union: Policy Issues & Analytical Models," Money Macro and Finance (MMF) Research Group Conference 2006 165, Money Macro and Finance Research Group.

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