Labor Mobility and Fiscal Policy in a Currency Union
39 Pages Posted: 27 Jan 2015
Date Written: January 26, 2015
Abstract
Labor mobility is commonly taken as a property of an optimal currency area. But how does that property affect the outcome of fiscal policies? In our model, we show that perfect (costless) labour mobility is not necessarily welfare improving, since it prevents the national fiscal authorities from pursuing independent policies, opening the way to a coordination problem. With symmetric shocks, the federal fiscal policy can improve welfare by playing a coordinating role. With asymmetric shocks, the federal policy allows both countries to reach a higher productive efficiency, provided the federal government is endowed with a federal budget.
Keywords: currency union, labor mobility, fiscal policy, federation
JEL Classification: E620, H770
Suggested Citation: Suggested Citation