The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?

20 Pages Posted: 14 Jul 2008

See all articles by Andrea Colciago

Andrea Colciago

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

V. Anton Muscatelli

affiliation not provided to SSRN

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

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Abstract

We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DSGE model, incorporating non-Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non-Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country-specific shocks does not suggest potential inter-country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility.

Suggested Citation

Colciago, Andrea and Muscatelli, V. Anton and Tirelli, Patrizio, The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?. Review of International Economics, Vol. 16, Issue 3, pp. 591-610, August 2008, Available at SSRN: https://ssrn.com/abstract=1158803 or http://dx.doi.org/10.1111/j.1467-9396.2008.00747.x

Andrea Colciago (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

V. Anton Muscatelli

affiliation not provided to SSRN

Patrizio Tirelli

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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