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Fiscal policy coordination in monetary unions

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  • Josef Schroth

    (Bank of Canada)

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    Abstract

    The paper studies the design of optimal fiscal rules for members of a monetary union when there are privately observed shocks to countries’ social cost of domestic taxation. First, I show that optimal fiscal rules prescribe policy coordination in the sense of domestic taxation efforts that are positively correlated across member countries. In particular, coordination achieves higher ex-ante joint welfare than any fixed upper bound on domestic deficits. Second, I show that a history of asymmetric domestic taxation efforts leads to tighter policy coordination in the sense of an emergence of retaliatory fiscal policies. As a result, past disagreement leads to an increase in expected domestic deficits across the monetary union.

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    File URL: http://www.economicdynamics.org/meetpapers/2013/paper_74.pdf
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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 74.

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    Date of creation: 2013
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    Handle: RePEc:red:sed013:74

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    1. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
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    8. William Fuchs & Francesco Lippi, 2005. "Monetary Union with Voluntary Participation," Discussion Papers 04-013, Stanford Institute for Economic Policy Research.
    9. Susan Athey & Andrew Atkeson & Patrick J. Kehoe, 2005. "The Optimal Degree of Discretion in Monetary Policy," Econometrica, Econometric Society, vol. 73(5), pages 1431-1475, 09.
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