Killing two birds with one currency: Income and fiscal policies in a growth model of a currency union

Alberto Bagnai and Arsène Rieber

Journal of Post Keynesian Economics, 2019, vol. 42, issue 2, 274-298

Abstract: Building on a two-country Kaleckian model of a currency union, we examine the consequences of balance-of-payments adjustment policies, focusing on the interdependence between the long-run growth paths of member countries. The model separates the short-run from the long-run dynamic, comparing price and wage dynamics in each country in the light of Thirlwall’s balance-of-payments-constrained growth model. We show that by shifting the burden of adjustment to the less competitive country, austerity and wage moderation policies lead to long-term recessionary effects. Only expansionary policies in the more competitive country can achieve the two goals of reducing external imbalances and increasing the long-run growth rate in both member countries.

Date: 2019
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Working Paper: Killing two birds with one currency: Income and fiscal policies in a growth model of a currency union (2018)
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DOI: 10.1080/01603477.2018.1458630

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