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Federal fiscal transfer rules in monetary unions

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  • Evers, Michael P.

Abstract

This paper considers simple rules for federal fiscal transfers that automatically redistribute funds among member states of a monetary union to counteract adverse idiosyncratic shocks. The transfer rules target regional differences in nominal GDP, consumption spending, labor income, and fiscal deficits. Targeting regional fiscal deficits is the only rule that reduces consumption fluctuations and that promotes interregional consumption risk sharing, but the overall welfare effect is negative. In contrast, targeting regional differences in labor income yields the largest welfare gains, but it also yields the largest fluctuations in consumption and real GDP. It is demonstrated that the welfare gains primarily stem from reducing the allocative inefficiency of input factors caused by nominal rigidities. The optimal transfer rule essentially implies a combination of consumption spending and labor income targeting, and it primarily targets the allocative inefficiency of factor inputs at the cost of lower interregional consumption risk sharing.

Suggested Citation

  • Evers, Michael P., 2012. "Federal fiscal transfer rules in monetary unions," European Economic Review, Elsevier, vol. 56(3), pages 507-525.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:507-525
    DOI: 10.1016/j.euroecorev.2011.12.002
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    Keywords

    Macro aspects of fiscal federalism; Monetary union; Stabilization; Interregional risk sharing;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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