The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?*

Andrea Colciago, Tiziano Ropele, Vito Muscatelli and Patrizio Tirelli

Review of International Economics, 2008, vol. 16, issue 3, 591-610

Abstract: We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two‐country New Keynesian DSGE model, incorporating non‐Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non‐Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country‐specific shocks does not suggest potential inter‐country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility.

Date: 2008
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https://doi.org/10.1111/j.1467-9396.2008.00747.x

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Working Paper: The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective? (2006)
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