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Fiscal Federalism in a Monetary Union: The No-Cooperation Pitfall

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  • Hubert Kempf

    (Ecole Normale Supérieure Paris Saclay
    NRU Higher School of Economics
    Ces-Ifo)

Abstract

The relative merits in a monetary union of a fiscal federalism scheme and intergovernmental fiscal cooperation without a federal authority are assessed using a standard macroeconomic model commonly used for policy analysis. We show that it is impossible to conclude that one solution is always preferable to the other. The benefits from an extra instrument and a policymaker with union-wide objectives may not compensate the adding of a non-cooperative player to the policy game. This result is sustained when an active monetary policy is introduced in the model or when shocks affect the functioning of the economy. The welfare ranking of these two options depends on the cross-border spillover effects, the objectives of policymakers and the variances of shocks.

Suggested Citation

  • Hubert Kempf, 2021. "Fiscal Federalism in a Monetary Union: The No-Cooperation Pitfall," Open Economies Review, Springer, vol. 32(1), pages 109-151, February.
  • Handle: RePEc:kap:openec:v:32:y:2021:i:1:d:10.1007_s11079-019-09571-5
    DOI: 10.1007/s11079-019-09571-5
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    More about this item

    Keywords

    Monetary union; Fiscal federalism; Cooperation; Policymix;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories

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