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A transfer mechanism for a monetary union

Author

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  • Engler, Philipp
  • Voigts, Simon

Abstract

We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete financial markets and no labor migration across member states, significantly increases volatility of consumption and employment in the face of asymmetric shocks. We propose a simple transfer mechanism between member countries of the union that reduces this volatility. Furthermore, we show that this mechanism is more efficient than anticyclical policies at the national level in terms of a better stabilization for the same budgetary effects for households while in the long run deeper integration of goods markets could reduce volatility significantly. Regarding its implementation, we show that the centralized provision of public goods and services at the level of the monetary union implies cross-country transfers comparable to the scheme under study.

Suggested Citation

  • Engler, Philipp & Voigts, Simon, 2013. "A transfer mechanism for a monetary union," Discussion Papers 2013/2, Free University Berlin, School of Business & Economics.
  • Handle: RePEc:zbw:fubsbe:20132
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    References listed on IDEAS

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    1. Charles R. Bean, 1992. "Economic and Monetary Union in Europe," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 31-52, Fall.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, pages 163-185.
    3. Michael D. Bordo & Lars Jonung & Agnieszka Markiewicz, 2013. "A Fiscal Union for the Euro: Some Lessons from History ," CESifo Economic Studies, CESifo, vol. 59(3), pages 449-488, September.
    4. Andrea Colciago & Tiziano Ropele & V. Anton Muscatelli & Patrizio Tirelli, 2008. "The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 591-610, August.
    5. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, vol. 104(3), pages 753-792, March.
    6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    7. Ferrero, Andrea, 2009. "Fiscal and monetary rules for a currency union," Journal of International Economics, Elsevier, pages 1-10.
    8. Bergin, Paul R., 2006. "How well can the New Open Economy Macroeconomics explain the exchange rate and current account?," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 675-701, August.
    9. Kerstin Bernoth & Philipp Engler, 2013. "A Transfer Mechanism as a Stabilization Tool in the EMU," DIW Economic Bulletin, DIW Berlin, German Institute for Economic Research, vol. 3(1), pages 3-8.
    10. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    11. Evers, Michael P., 2012. "Federal fiscal transfer rules in monetary unions," European Economic Review, Elsevier, vol. 56(3), pages 507-525.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Is an imperfect monetary union leading to more volatility?
      by Economic Logician in Economic Logic on 2013-05-01 19:07:00

    Citations

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    Cited by:

    1. Marius Clemens & Guillaume Claveres, 2017. "Unemployment Insurance Union," 2017 Meeting Papers 1340, Society for Economic Dynamics.
    2. Etienne Farvaque & Florence Huart, 2017. "A policymaker’s guide to a Euro area stabilization fund," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(1), pages 11-30, April.
    3. Poeschel, Friedrich, 2012. "Assortative matching through signals," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62061, Verein für Socialpolitik / German Economic Association.
    4. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2013. "Fiscal integration in the eurozone: Economic effects of two key scenarios," ZEW Discussion Papers 13-106, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Dolls, Mathias & Fuest, Clemens & Neumann, Dirk & Peichl, Andreas, 2014. "An Unemployment Insurance Scheme for the Euro Area," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100572, Verein für Socialpolitik / German Economic Association.
    6. Verstegen, Loes & Meijdam, Lex, 2016. "The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union : A DSGE Model for the Euro Area," Discussion Paper 2016-023, Tilburg University, Center for Economic Research.

    More about this item

    Keywords

    monetary union; asymmetric shocks; fiscal policy; fiscal transfers;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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