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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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Bibliographic Info

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. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
  2. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, vol. 104(3), pages 753-92, March.
  3. 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.
  4. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
  5. Ferrero, Andrea, 2005. "Fiscal and monetary rules for a currency union," Working Paper Series 0502, European Central Bank.
  6. Evers, Michael P., 2012. "Federal fiscal transfer rules in monetary unions," European Economic Review, Elsevier, vol. 56(3), pages 507-525.
  7. 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.
  8. Bean, Charles R, 1992. "Economic and Monetary Union in Europe," CEPR Discussion Papers 722, C.E.P.R. Discussion Papers.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  10. 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, vol. 3(1), pages 3-8.
  11. Andrea Colciago & Anton Muscatelli & Tiziano Ropele & Patrizio Tirelli, 2006. "The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?," CESifo Working Paper Series 1682, CESifo Group Munich.
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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. Friedrich Poeschel, 2013. "Assortative matching through signals," 2013 Papers ppo178, Job Market Papers.
  2. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2014. "Fiscal Integration in the Eurozone: Economic Effects of Two Key Scenarios," EUROMOD Working Papers em1-14, EUROMOD at the Institute for Social and Economic Research.

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