Fiscal federalism in a monetary union: the cooperation pitfall

Hubert Kempf ()

No 2017-14, Working Papers from Center for Research in Economics and Statistics

Abstract: Fiscal federalism may not be a panacea in a monetary union if it does not address the non-cooperative behaviour between fiscal policymakers. To prove this, we assess the relative merits of a fiscal federalism scheme in a monetary union and intergovernmental fiscal cooperation without such a federal authority. Using a standard macroeconomic model commonly used for policy analysis we show that it is impossible to conclude that one solution is always preferable to the other. The benefits from an extra instrument and a policymaker with union-wide objectives may not compensate the adding of a non-cooperative player to the policy game. This result is sustained when an active monetary policy is introduced in the model or when shocks affect the functioning of the economy. The welfare ranking of these two options depends on the cros-border spillover effects, the objectives of policymakers and the variances of shocks.

Keywords: Monetary union; fiscal federation; cooperation; policymix (search for similar items in EconPapers)
JEL-codes: E62 E63 F45 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2017-10-17
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Fiscal Federalism in a Monetary Union: The No-Cooperation Pitfall (2021)
Working Paper: Fiscal Federalism in a Monetary Union: The Cooperation Pitfall (2017)
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