On Deficits and Symmetries in a Fiscal Capacity

SAFE Working Paper No. 112

14 Pages Posted: 30 Jul 2015

See all articles by Shafik Hebous

Shafik Hebous

International Monetary Fund

Alfons J. Weichenrieder

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy; Vienna University of Economics and Business; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: July 30, 2015

Abstract

There is a growing debate about complementing the European Monetary Union by a more comprehensive fiscal union. Against this background, this paper emphasizes that there is a trade-off in designing a system of fiscal transfers ("fiscal capacity") in a union between members of different size. A system cannot guarantee symmetric treatment of members and simultaneously ensure a balanced budget. We compute hypothetical transfers for the Eurozone members from 2001 to 2012 to illustrate this trade-off. Interestingly, a symmetric system that treats shocks in small and large countries symmetrically would have produced large budgetary surpluses in 2009, the worst year of the financial crisis.

Keywords: fiscal union, asymmetric shocks, federal transfers, optimum currency area

JEL Classification: H500, H600

Suggested Citation

Hebous, Shafik and Weichenrieder, Alfons J., On Deficits and Symmetries in a Fiscal Capacity (July 30, 2015). SAFE Working Paper No. 112. Available at SSRN: https://ssrn.com/abstract=2637776 or http://dx.doi.org/10.2139/ssrn.2637776

Shafik Hebous

International Monetary Fund ( email )

Washington, DC
United States

Alfons J. Weichenrieder (Contact Author)

Goethe University Frankfurt - Department of Applied Econometrics and International Economic Policy ( email )

United States

HOME PAGE: http://www.uni-frankfurt.de/fb02/weichenrieder/

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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