Thoughts on a Fiscal Union in EMU

38 Pages Posted: 25 Oct 2016

See all articles by Niklas Gadatsch

Niklas Gadatsch

German Council of Economic Experts

Josef Hollmayr

Goethe University Frankfurt

Nikolai Stahler

Deutsche Bundesbank - Economics Department

Date Written: 2016

Abstract

Using an estimated large-scale New-Keynesian model, we assess welfare and business cycle consequences of a fiscal union within EMU. We differentiate between three different scenarios: public revenue equalisation, tax harmonisation and a centralised fiscal authority. Relative to the status quo, long term consequences generate winners and losers depending on the degree of integration and on how key macroeconomic variables adjust. Short term differences between the regimes are minor, both in terms of business cycle statistics as well as in terms of risk sharing of asymmetric shocks. This also explains why welfare differences are negligibly small across the fiscal union scenarios. Even when introducing risk premia on government bonds, this general finding is not changed - although risk premia per se decrease welfare notably. We further perform a counterfactual exercise analysing the effects of what would have happened had a fiscal union regime been installed at the start of EMU already. While key macroeconomic variables would have reacted very similarly, debt dynamics could have changed notably over the estimation period.

Keywords: Fiscal Policy, Fiscal Union, DSGE-Modelling, Macroeconomics

JEL Classification: H2, J6, E32, E62

Suggested Citation

Gadatsch, Niklas and Hollmayr, Josef and Stahler, Nikolai, Thoughts on a Fiscal Union in EMU (2016). Bundesbank Discussion Paper No. 40/2016. Available at SSRN: https://ssrn.com/abstract=2857844

Niklas Gadatsch (Contact Author)

German Council of Economic Experts ( email )

Federal Statistical Office
Gustav-Stresemann-Ring 11
Wiesbaden, Hessen 65180
Germany

Josef Hollmayr

Goethe University Frankfurt ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Nikolai Stahler

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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