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"Set a Sufficiently Ambitious Budget Target and Let the Automatic Stabilizers Work". Will it Really Work in the European Monetary Union?

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  • Francesco Farina
  • Roberto Tamborini

Abstract

We examine the popular recipe in the title by means of an AD-LM-AS two-country model of the EMU, controlling for asymmetry in demand and supply shocks and in the monetary-policy transmission mechanism. Unless structural symmetry holds and symmetric shock occurs, national automatic stabilizers, even though supplemented with the common monetary policy, cannot deliver optimal stabilization in each economy. Inflation and output gaps are not closed and may be divergent in sign. Considering that a federal system of inter-regional insurance is lacking, the recipe under examination is too optimistic, while serious threat to EMU "cohesion" may arise. The econometric estimates we present show that existing national fiscal systems work very poorly as for the minimization, after shocks, of the dispersion of national incomes around the EMU average.

Suggested Citation

  • Francesco Farina & Roberto Tamborini, 2004. ""Set a Sufficiently Ambitious Budget Target and Let the Automatic Stabilizers Work". Will it Really Work in the European Monetary Union?," Open Economies Review, Springer, vol. 15(2), pages 143-168, April.
    • Handle: RePEc:kap:openec:v:15:y:2004:i:2:p:143-168
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    Cited by:

    1. Angelini, Elisabetta Croci & Farina, Francesco, 2012. "Current account imbalances and systemic risk within a monetary union," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 647-656.
    2. repec:hal:wpspec:info:hdl:2441/9857 is not listed on IDEAS
    3. Vassilis Monastiriotis & Sotirios Zartaloudis, 2010. "Beyond the crisis: EMU and labour market reform pressures in good and bad times," LEQS – LSE 'Europe in Question' Discussion Paper Series 23, European Institute, LSE.
    4. Stefano Schiavo, 2008. "Financial Integration, GDP Correlation and the Endogeneity of Optimum Currency Areas," Economica, London School of Economics and Political Science, vol. 75(297), pages 168-189, February.
    5. repec:hal:spmain:info:hdl:2441/9857 is not listed on IDEAS
    6. Davide Furceri & Annabelle Mourougane, 2009. "Financial Crises: Past Lessons and Policy Implications," OECD Economics Department Working Papers 668, OECD Publishing.
    7. Furceri, Davide, 2010. "Stabilization effects of social spending: Empirical evidence from a panel of OECD countries," The North American Journal of Economics and Finance, Elsevier, vol. 21(1), pages 34-48, March.
    8. repec:spo:wpecon:info:hdl:2441/9857 is not listed on IDEAS

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