Monetary Union and Fiscal Federalism

Kenneth Kletzer and Juergen von Hagen

No 2615, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Does a monetary union need fiscal shock absorbers helping the participating countries to cope with asymmetric shocks? The consensus in the debate over EMU argues that the answer is yes. In this paper, we revisit the issue, building on a dynamic, general equilibrium framework of regions in a monetary union exposed to asymmetric shocks. We show that inter-regional taxes and transfers can stabilize regional employment or consumption, but not both. The welfare effects of such a stabilization are, however, ambiguous. In contrast to a popular argument in the EMU debate, inter-regional taxes and transfers do not reduce the incentives for goods and labour market deregulation in the regions, provided that the degree of trade integration among the regions is large. There is, however, reason to coordinate regional reform policies to avoid adverse effects on the aggregate performance of the union.

Keywords: Regional employment stabilization; Monetary union; Regional insurance (search for similar items in EconPapers)
JEL-codes: E42 E63 F33 F42 (search for similar items in EconPapers)
Date: 2000-11
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Citations: View citations in EconPapers (20)

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