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The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?

  • Andrea Colciago
  • Tiziano Ropele
  • V. Anton Muscatelli
  • Patrizio Tirelli

We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DSGE model, incorporating non-Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non-Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country-specific shocks does not suggest potential inter-country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 16 (2008)
Issue (Month): 3 (08)
Pages: 591-610

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Handle: RePEc:bla:reviec:v:16:y:2008:i:3:p:591-610
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