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Price differentials in monetary unions: The role of fiscal shocks

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  • Fabio Canova

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  • Evi Pappa

Abstract

We study the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries. We identify shocks using sign restrictions on the dynamics of deficits and output and construct two estimates for structural price differentials dynamics which optimally weight the information contained in the data for all units. Fiscal shocks explain between 14 and 23 percent of the variability of price differentials both in the US and in the EU. On average, expansionary fiscal disturbances produce positive price differential responses while distortionary balance budget shocks produce negative price differential responses. In a number of units, price differential responses to expansionary fiscal shocks are negative. Spillovers and labor supply effects partially explain this pattern while geographical, political, and economic indicators do not.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 923.

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Date of creation: Jun 2003
Date of revision: Jun 2005
Handle: RePEc:upf:upfgen:923

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Web page: http://www.econ.upf.edu/

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Keywords: Price differentials; Fiscal policy; Monetary unions; Bayesian methods;

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