Monetary Union and Fiscal Federalism

38 Pages Posted: 11 May 2001

See all articles by Kenneth M. Kletzer

Kenneth M. Kletzer

University of California at Santa Cruz; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Jürgen von Hagen

University of Bonn - Institute of Economic Policy; Centre for Economic Policy Research (CEPR)

Date Written: November 2000

Abstract

Does a monetary union need fiscal shock absorbers helping the participating countries to cope with asymmetric shocks? The consensus in the debate over EMU argues that the answer is yes. In this paper, we revisit the issue, building on a dynamic, general equilibrium framework of regions in a monetary union exposed to asymmetric shocks. We show that inter-regional taxes and transfers can stabilize regional employment or consumption, but not both. The welfare effects of such a stabilization are, however, ambiguous. In contrast to a popular argument in the EMU debate, inter-regional taxes and transfers do not reduce the incentives for goods and labour market deregulation in the regions, provided that the degree of trade integration among the regions is large. There is, however, reason to coordinate regional reform policies to avoid adverse effects on the aggregate performance of the union.

Keywords: Regional employment stabilization, monetary union, regional insurance

JEL Classification: E42, E63, F33, F42

Suggested Citation

Kletzer, Kenneth M. and von Hagen, Jürgen, Monetary Union and Fiscal Federalism (November 2000). CEPR Discussion Paper No. 2615. Available at SSRN: https://ssrn.com/abstract=269681

Kenneth M. Kletzer (Contact Author)

University of California at Santa Cruz ( email )

Santa Cruz, CA 95064
United States
(408) 459-3407 (Phone)
(408) 459-5000 (Fax)

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

Poschinger Str. 5
Munich, DE-81679
Germany

Jürgen Von Hagen

University of Bonn - Institute of Economic Policy ( email )

Adenauerallee 24
D-53113 Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
30
Abstract Views
1,445
PlumX Metrics