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How important is fiscal policy cooperation in a currency union?

  • Okano, Eiji

By constructing a dynamic stochastic general equilibrium model, which assumes a currency union consisting of two countries with nontradables, we study the importance of fiscal policy cooperation. As shown in the previous studies, we find that the role of fiscal policy is important in maximizing social welfare. However, we have a contrary result for fiscal policy cooperation. While the previous studies highlight that fiscal policy cooperation has a nontrivial effect in maximizing social welfare, we show that fiscal policy cooperation has no benefits, regardless of the share of nontradables. Self-oriented fiscal policy can replicate social welfare under the cooperative setting.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 38 (2014)
Issue (Month): C ()
Pages: 266-286

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Handle: RePEc:eee:dyncon:v:38:y:2014:i:c:p:266-286
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