Imbalances and fiscal policy in a monetary union

Ida Hjortsoe

Journal of International Economics, 2016, vol. 102, issue C, 225-241

Abstract: This paper analyses optimal fiscal policy within a model of a monetary union in which agents cannot perfectly insure themselves against country-specific shocks. I show that optimal cooperative fiscal policies consist in more than just stabilizing output gaps: policy makers can increase welfare by responding to sub-optimal intra-union imbalances. Numerical analysis reveals that if traded goods are little substitutable, optimal cooperative fiscal policies consist in setting government spending in each country so as to reduce intra-union imbalances, potentially at the expense of higher output gaps. Optimal fiscal policies reduce the welfare losses from business cycle fluctuations considerably.

Keywords: Monetary union; International policy cooperation; Optimal monetary and fiscal policies; Risk sharing (search for similar items in EconPapers)
JEL-codes: E44 E62 E63 F41 F42 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:102:y:2016:i:c:p:225-241

DOI: 10.1016/j.jinteco.2016.07.002

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