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Implementing a Fiscal Transfer Mechanism in a Heterogeneous Monetary Union: A DSGE approach

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  • Thierry Betti

Abstract

This paper deals with the implementation of a fiscal transfer mechanism among countries of a monetary union. I use a DSGE model of a monetary union close to Beetsma and Jensen (2005) and introduce both national fiscal policies and a transfer mechanism. I show the transfer has two effects: an obvious shift in demand but also a destabilizing effect due to a higher degradation of the term of trade for the recipient member. Then, I focus on two structural heterogeneities: the sensitivity to the transfer and the relative size of the two countries. I discuss in what extent these heterogeneities affect the effectiveness of the transfer.

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Bibliographic Info

Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2013-19.

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Date of creation: 2013
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Handle: RePEc:ulp:sbbeta:2013-19

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Keywords: fiscal federalism; transfer mechanism; new-Keynesian models; monetary union.;

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