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A Transfer Mechanism for a Monetary Union

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  • Philipp Engler
  • Simon Voigts

Abstract

We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete nancial markets and no labor migration across member states, signi cantly increases volatility of consumption and employment in the face of asymmetric shocks. We propose a simple transfer mechanism between member countries of the union that reduces this volatility. Further- more, we show that this mechanism is more e¢ cient than anticyclical policies at the national level in terms of a better stabilization for the same budgetary e¤ects for households while in the long run deeper integration of goods markets could reduce volatility signi cantly. Re- garding its implementation, we show that the centralized provision of public goods and services at the level of the monetary union implies cross-country transfers comparable to the scheme under study.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-013.

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Length: 41 pages
Date of creation: Mar 2013
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2013-013

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Keywords: Monetary Union; Asymmetric Shocks; Fiscal Policy; Fiscal Transfers;

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References

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  1. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research, National Bank of Belgium 35, National Bank of Belgium.
  2. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  3. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(4), pages 31-52, Fall.
  4. Andrea Colciago & Tiziano Ropele & V. Anton Muscatelli & Patrizio Tirelli, 2008. "The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 16(3), pages 591-610, 08.
  5. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers, Rutgers University, Department of Economics 200115, Rutgers University, Department of Economics.
  6. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc.
  7. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, American Economic Association, vol. 104(3), pages 753-92, March.
  8. Michael D. Bordo & Agnieszka Markiewicz & Lars Jonung, 2011. "A Fiscal Union for the Euro: Some Lessons from History," NBER Working Papers 17380, National Bureau of Economic Research, Inc.
  9. Andrea Ferrero, 2005. "Fiscal and Monetary Rules for a Currency Union," Macroeconomics, EconWPA 0508020, EconWPA.
  10. Evers, Michael P., 2012. "Federal fiscal transfer rules in monetary unions," European Economic Review, Elsevier, Elsevier, vol. 56(3), pages 507-525.
  11. Kerstin Bernoth & Philipp Engler, 2013. "A Transfer Mechanism as a Stabilization Tool in the EMU," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, DIW Berlin, German Institute for Economic Research, vol. 3(1), pages 3-8.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Is an imperfect monetary union leading to more volatility?
    by Economic Logician in Economic Logic on 2013-05-01 14:07:00
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Cited by:
  1. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2013. "Fiscal integration in the eurozone: Economic effects of two key scenarios," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-106, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Poeschel, Friedrich, 2012. "Assortative matching through signals," IAB Discussion Paper, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany] 201215, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].

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