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Implementing a Fiscal Transfer Mechanism in a Heterogeneous Monetary Union: A DSGE approach

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  • Thierry Betti

Abstract

This paper deals with the implementation of a fiscal transfer mechanism among countries of a monetary union. I use a DSGE model of a monetary union close to Beetsma and Jensen (2005) and introduce both national fiscal policies and a transfer mechanism. I show the transfer has two effects: an obvious shift in demand but also a destabilizing effect due to a higher degradation of the term of trade for the recipient member. Then, I focus on two structural heterogeneities: the sensitivity to the transfer and the relative size of the two countries. I discuss in what extent these heterogeneities affect the effectiveness of the transfer.

Suggested Citation

  • Thierry Betti, 2013. "Implementing a Fiscal Transfer Mechanism in a Heterogeneous Monetary Union: A DSGE approach," Working Papers of BETA 2013-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2013-19
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    File URL: http://beta.u-strasbg.fr/WP/2013/2013-19.pdf
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    More about this item

    Keywords

    fiscal federalism; transfer mechanism; new-Keynesian models; monetary union.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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