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Fiscal policy coordination in monetary unions

  • Josef Schroth

    (Bank of Canada)

The paper studies the design of optimal fiscal rules for members of a monetary union when there are privately observed shocks to countries’ social cost of domestic taxation. First, I show that optimal fiscal rules prescribe policy coordination in the sense of domestic taxation efforts that are positively correlated across member countries. In particular, coordination achieves higher ex-ante joint welfare than any fixed upper bound on domestic deficits. Second, I show that a history of asymmetric domestic taxation efforts leads to tighter policy coordination in the sense of an emergence of retaliatory fiscal policies. As a result, past disagreement leads to an increase in expected domestic deficits across the monetary union.

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File URL: https://www.economicdynamics.org/meetpapers/2013/paper_74.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 74.

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Date of creation: 2013
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Handle: RePEc:red:sed013:74
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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