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Fiscal policy coordination in monetary unions

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  • Josef Schroth

    (Bank of Canada)

Abstract

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.

Suggested Citation

  • Josef Schroth, 2013. "Fiscal policy coordination in monetary unions," 2013 Meeting Papers 74, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:74
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    File URL: https://economicdynamics.org/meetpapers/2013/paper_74.pdf
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    References listed on IDEAS

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