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Financial Integration and Fiscal Policy Efficiency in a Monetary Union

Author

Listed:
  • Gilbert Koenig
  • Irem Zeyneloglu

Abstract

The gap between the interest rates of different members of the European Monetary Union (EMU) points out to an imperfect degree of financial integration despite the common currency. This paper develops a two-country New Open Economy Macroeconomics (NOEM) model with imperfect financial integration in a monetary union in order to analyze fiscal policy efficiency and the impact of financial integration on the international transmission of fiscal policy shocks. For this, we introduce imperfect financial integration into the fixed exchange rate version of Obstfeld-Rogoff (1995, 1996). We show that a higher degree of financial integration decreases short run consumption and interest rate volatility in both countries while it increases the volatility in the long run following a balanced-budget increase in government spending in one of the countries. In terms of welfare, the degree of financial integration is irrelevant since it has no effect on the utility of the members.

Suggested Citation

  • Gilbert Koenig & Irem Zeyneloglu, 2007. "Financial Integration and Fiscal Policy Efficiency in a Monetary Union," Working Papers of BETA 2007-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2007-13
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    File URL: http://beta.u-strasbg.fr/WP/2007/2007-13.pdf
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    Citations

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    Cited by:

    1. Estelle Dhont-Peltrault & Etienne Pfister, 2007. "R&D cooperation versus R&D subcontracting: empirical evidence from French survey data," Working Papers of BETA 2007-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    2. Gisèle Umbhauer, 2007. "De l’amiante au chrysotile, un glissement stratégique dans la désinformation," Working Papers of BETA 2007-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    3. Li Qin & Eleftherios Spyromitros & Moïse Sidiropoulos, 2007. "Monetary Policy with Uncertain Central Bank Preferences for Robustness," Working Papers of BETA 2007-23, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Sofia Pessoa e Costa & Stéphane Robin, 2007. "The Impact Of Training Programmes On Wages In France: An Evaluation Of The “Qualifying Contract” Using Propensity Scores," Working Papers of BETA 2007-18, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

    More about this item

    Keywords

    New open economy macroeconomics; fiscal policy; financial integration; monetary union.;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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