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The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area

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  • Loes Verstegen
  • Lex Meijdam

Abstract

In this paper, we incorporate a transfer mechanism into a DSGE model with a rich fiscal sector to assess the effectiveness of fiscal transfers for a monetary union, in particular for the Economic and Monetary Union. Using a heterogeneous setup, the model is estimated for the North and the South of Europe using Bayesian methods. The results show that the transfer mechanism is effective in stabilizing the economy of the southern block of countries during the financial crisis, although the total welfare effect for the EMU is negative, though small. Ex ante, a transfer mechanism would be beneficial for both the North and the South in terms of welfare and stabilization purposes.

Suggested Citation

  • Loes Verstegen & Lex Meijdam, 2016. "The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area," EcoMod2016 9622, EcoMod.
  • Handle: RePEc:ekd:009007:9622
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    References listed on IDEAS

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    Cited by:

    1. Nadav Ben Zeev & Ohad Raveh, 2017. "Monetary Policy, Fisal Federalism, and Capital Intensity," OxCarre Working Papers 181, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

    More about this item

    Keywords

    Economic and Monetary Union of Europe; General equilibrium modeling; Public finance;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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