One EMU Fiscal Policy for the EURO

Alexandre Cole (), Chiara Guerello and Guido Traficante

No 1602, Working Papers CELEG from Dipartimento di Economia e Finanza, LUISS Guido Carli

Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties of different degrees of fiscal policy coordination, in a setting where the union-wide monetary policy affects fiscal policies and viceversa, because of price rigidities and distortionary taxation. We calibrate the model to represent two groups of countries in the European Economic and Monetary Union and run numerical simulations of the model under a range of alternative shocks and under alternative scenarios for fiscal policy. We also compare welfare under the different scenarios, bringing to policy conclusions for the proper macroeconomic management of a Currency Union. We find that: a) coordinating fiscal policy by targeting net exports, rather than output, produces more stable dynamics, b) consolidating government budget constraints across countries and moving tax rates jointly provides greater stabilization, c) taxes on wage income are exponentially more distortionary than taxes on firm sales. Our policy prescriptions for the Eurozone are then to use fiscal policy to reduce international demand imbalances, either by stabilizing trade fl ows across countries or by creating some form of fiscal union or both, while avoiding the excessive use of labour taxes, in favour of sales taxes.

Keywords: Fiscal Policy; International Policy Coordination; Monetary Union; New Keynesian. (search for similar items in EconPapers)
JEL-codes: E12 E62 E63 F42 F45 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-eec, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: ONE EMU FISCAL POLICY FOR THE EURO (2020)
Working Paper: One EMU Fiscal Policy for the EURO (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:lui:celegw:1602

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