Fiscal policy and regional inflation in a currency union
Margarida Duarte and
Alexander Wolman ()
No 03-11, Working Paper from Federal Reserve Bank of Richmond
This paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy. We study the interaction between regional fiscal policy and inflation differentials in a flexible-price, two-region model with both traded and nontraded goods. For symmetric regions, changes in one region?s tax rule that decrease the volatility of its inflation differential also decrease the volatility of its output. The decrease in the volatility of the inflation differential is brought about by an increase in the volatility of tax rates. The effect of the tax rule on output volatility ? but not inflation volatility ? depends on country size. For a small country lower volatility of inflation differentials is associated with higher volatility of output. This relationship results from the fact that small countries are more open, and hence there is a greater role for traded goods productivity shocks.
Keywords: Fiscal policy; Inflation (Finance) (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed
Downloads: (external link)
http://www.richmondfed.org/publications/research/w ... rs/2003/wp_03-11.cfm (text/html)
http://www.richmondfed.org/publications/research/w ... 2003/pdf/wp03-11.pdf (application/pdf)
Journal Article: Fiscal policy and regional inflation in a currency union (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedrwp:03-11
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Paper from Federal Reserve Bank of Richmond Contact information at EDIRC.
Bibliographic data for series maintained by ().