Labor mobility and fiscal policy in a currency union

Angelo Baglioni, Andrea Boitani and Massimo Bordignon ()

No def020, DISCE - Working Papers del Dipartimento di Economia e Finanza from Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE)

Abstract: Labor mobility is commonly taken as a property of an optimal currency area. But how does that property a¤ect the outcome of fiscal policies? We address this issue with a two country ?two period model, where both asymmetric and symmetric productivity shocks may hit the countries. We show that perfect (costless) labour mobility is not necessarily welfare improving, since it prevents the national fiscal authorities from pursuing indepen- dent policies, opening the way to a coordination problem between them, which is particularly relevant when the two countries di¤er for their intertemporal preferences. With symmetric shocks, the federal fiscal policy can improve welfare over national policies by playing a coordinating role. With asymmet- ric shocks, the federal fiscal policy allows both countries to reach a higher productive efficiency; to do that, the federal government must be endowed with a federal budget, playing a stronger role than plain coordination between countries.

Keywords: currency union; labor mobility; fiscal policy; federation (search for similar items in EconPapers)
JEL-codes: E62 H77 (search for similar items in EconPapers)
Pages: 37
Date: 2014-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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http://dipartimenti.unicatt.it/economia-finanza-def020.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Labor Mobility and Fiscal Policy in a Currency Union (2016)
Working Paper: Labor Mobility and Fiscal Policy in a Currency Union (2015)
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