Budget-neutral fiscal rules targeting inflation differentials

Maren Brede

No 2016-007, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: In light of persistent in ation dispersion and rising debt levels in the EMU, this paper investigates the welfare implications of budget-neutral scal policies that counteract in ation di erentials. In a two-country DSGE model of a monetary union with traded and non-traded goods a national scal authority is able to reduce welfare losses arising from asymmetric shocks by following a Taylor-type rule for consumption taxes while using labour income taxes to balance its budget. Under technology and government spending shocks welfare losses can be reduced by up to 15%.

Keywords: inflation differentials; monetary union; fiscal policy; budget-neutral policy (search for similar items in EconPapers)
JEL-codes: E62 E63 F41 F45 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:sfb649:sfb649dp2016-007

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