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Killing two birds with one currency: Income and fiscal policies in a growth model of a currency union

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  • Alberto Bagnai
  • Arsène Rieber

Abstract

Building on a two-country Kaleckian model of a currency union, we examine the consequences of balance-of-payments adjustment policies, focusing on the interdependence between the long-run growth paths of member countries. The model separates the short-run from the long-run dynamic, comparing price and wage dynamics in each country in the light of Thirlwall’s balance-of-payments-constrained growth model. We show that by shifting the burden of adjustment to the less competitive country, austerity and wage moderation policies lead to long-term recessionary effects. Only expansionary policies in the more competitive country can achieve the two goals of reducing external imbalances and increasing the long-run growth rate in both member countries.

Suggested Citation

  • Alberto Bagnai & Arsène Rieber, 2019. "Killing two birds with one currency: Income and fiscal policies in a growth model of a currency union," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(2), pages 274-298, April.
  • Handle: RePEc:mes:postke:v:42:y:2019:i:2:p:274-298
    DOI: 10.1080/01603477.2018.1458630
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