Smoothing shocks and balancing budgets in a currency union^M

Beatriz de Blas () and James Costain

No 975, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Using a sticky-price DSGE matching model of a small open economy in a currency union, we compare the business cycle implications of several different fiscal rules that all achieve the same reduction in the standard deviation of the public debt. In our simulations, compared with rules that adjust tax rates, a rule that stabilizes the budget by adjusting public salaries and transfers reduces fluctuations in consumption, employment, and private and public after-tax real wages, thus bringing the market economy closer to the social planner's solution.

Date: 2012
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Working Paper: Smoothing shocks and balancing budgets in a currency union (2012)
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