A fiscal capacity with endogenous access in a monetary union

Dennis Bonam, Marien Ferdinandusse and Pascal Jacquinot

Economics Letters, 2022, vol. 221, issue C

Abstract: We study the stabilization properties and welfare implications of a fiscal capacity in a New Keynesian model for a monetary union. A novel feature of the model is that access to the fiscal capacity is conditional on a country’s public debt accumulation being sufficiently low. Likewise, the national fiscal effort to stabilize debt is more ambitious at higher debt levels. We show that the fiscal capacity reduces union-wide macroeconomic variability and raises union-wide welfare by reducing the incidence of regimes with large (pro-cyclical) fiscal consolidations. Welfare gains are higher under greater trade openness and price stickiness.

Keywords: Fiscal capacity; Monetary union; Endogenous regime switching (search for similar items in EconPapers)
JEL-codes: E32 E62 F45 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:221:y:2022:i:c:s0165176522003901

DOI: 10.1016/j.econlet.2022.110916

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