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Imbalances and fiscal policy in a monetary union

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  • Hjortsoe, Ida

Abstract

This paper analyses optimal fiscal policy within a model of a monetary union in which agents cannot perfectly insure themselves against country-specific shocks. I show that optimal cooperative fiscal policies consist in more than just stabilizing output gaps: policy makers can increase welfare by responding to sub-optimal intra-union imbalances. Numerical analysis reveals that if traded goods are little substitutable, optimal cooperative fiscal policies consist in setting government spending in each country so as to reduce intra-union imbalances, potentially at the expense of higher output gaps. Optimal fiscal policies reduce the welfare losses from business cycle fluctuations considerably.

Suggested Citation

  • Hjortsoe, Ida, 2016. "Imbalances and fiscal policy in a monetary union," Journal of International Economics, Elsevier, vol. 102(C), pages 225-241.
  • Handle: RePEc:eee:inecon:v:102:y:2016:i:c:p:225-241
    DOI: 10.1016/j.jinteco.2016.07.002
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    References listed on IDEAS

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    Cited by:

    1. Alexandre Lucas Cole & Chiara Guerello & Guido Traficante, 2016. "Government Debt Deleveraging in the EMU," Working Papers CELEG 1603, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    2. Kobielarz, Michal, 2018. "The economics of monetary unions," Other publications TiSEM b0293536-68ec-4905-bffd-6, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Monetary union; International policy cooperation; Optimal monetary and fiscal policies; Risk sharing;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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