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Fiscal and monetary policy in the enlarged European Union

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Author Info
Sabina Pogorelec () (European Investment Bank, 100 boulevard Konrad Adenauer, L-2950 Luxembourg, Luxembourg.)
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 ofjoint 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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Paper provided by European Central Bank in its series Working Paper Series with number 655.

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Length: 59 pages
Date of creation: Jul 2006
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Handle: RePEc:ecb:ecbwps:20060655

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Keywords: Fiscal policy cooperation; Foreign ownership of firms; Fiscal-monetary interactions; Enlarged European Union; Central and eastern European countries.;

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(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. 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. [Downloadable!]
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