Price differentials in monetary unions: The role of fiscal shocks

Fabio Canova and Evi Pappa

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries. We identify shocks using sign restrictions on the dynamics of deficits and output and construct two estimates for structural price differentials dynamics which optimally weight the information contained in the data for all units. Fiscal shocks explain between 14 and 23 percent of the variability of price differentials both in the US and in the EU. On average, expansionary fiscal disturbances produce positive price differential responses while distortionary balance budget shocks produce negative price differential responses. In a number of units, price differential responses to expansionary fiscal shocks are negative. Spillovers and labor supply effects partially explain this pattern while geographical, political, and economic indicators do not.

Keywords: Price differentials; Fiscal policy; Monetary unions; Bayesian methods (search for similar items in EconPapers)
JEL-codes: E3 E5 H7 (search for similar items in EconPapers)
Date: 2003-06, Revised 2005-06
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Related works:
Journal Article: Price Differentials in Monetary Unions: The Role of Fiscal Shocks (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:923

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