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Does a Federal Country Need Federal Transferences when it has Labour Mobility?

Listed author(s):
  • Tiago Neves Sequeira


    (UBI and INOVA)

  • Alexandra Ferreira-Lopes


    (ISCTE - Department of Economics, UNIDE-ERC and DINĂ‚MIA)

In this work we empirically test optimum currency area theory regarding the efficiency of two usual stabilization mechanisms for members of a given monetary union (the United States): federal transfers and migration. The US is recognized as a country where labor mobility between states is high. Despite of this flexibility in the labor market, the Federal Budget still grants some significant amount of funding to the states. Does the country need these two stabilization mechanisms to achieve cyclical convergence between the states? In this paper we jointly assess the consequences of having federal transfers and labor mobility in terms of the states' cyclical output. We conclude that federal transfers undoubtedly contribute to increase cyclical output. However, outmigration may increase or decrease cyclical output, depending on certain conditions. As federal transfers proved to be much more important than migration, the answer to the question in the title is `yes'.

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Paper provided by ISCTE-IUL, Business Research Unit (BRU-IUL) in its series Working Papers Series 1 with number ercwp0708.

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Length: 21 pages
Date of creation: 15 Jun 2008
Handle: RePEc:isc:iscwp1:ercwp0708
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