One EMU Fiscal Policy for the EURO

Alexandre Cole (), Chiara Guerello and Guido Traficante

MPRA Paper from University Library of Munich, Germany

Abstract: We build a two-country New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties and welfare implications of different fiscal policy scenarios. Our main findings are that a government spending rule which targets the net exports gap rather than the domestic output gap produces more stable dynamics and that consolidating government budget constraints across countries with symmetric tax rate movements provides greater stabilization. A key role is played by the trade elasticity which determines the impact of the terms of trade on net exports. In fact, when goods are complements, the stabilization properties of coordinating fiscal policies are no longer supported. These findings point out to possible policy prescriptions for the Euro Area: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of Fiscal Union or both.

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: 2018
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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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 (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:97380

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