A Fiscal Capacity with Endogenous Access in a Monetary Union

11 Pages Posted: 16 Apr 2022

See all articles by Dennis Bonam

Dennis Bonam

De Nederlandsche Bank

Marien Ferdinandusse

European Central Bank (ECB)

Pascal Jacquinot

affiliation not provided to SSRN

Abstract

We study the stabilization properties and welfare implications of a fiscal capacity in a New Keynesian model for a monetary union. A novel feature of the model is that access to the fiscal capacity is conditional on a country’s public debt accumulation being sufficiently low. Likewise, the national fiscal effort to stabilize debt is more ambitious at higher debt levels. We show that the fiscal capacity reduces union-wide macroeconomic variability and raises union-wide welfare by reducing the incidence of regimes with large (pro-cyclical) fiscal consolidations. Welfare gains are higher under greater trade openness and price stickiness.

Keywords: fiscal capacity, monetary union, endogenous regime switching

Suggested Citation

Bonam, Dennis and Ferdinandusse, Marien and Jacquinot, Pascal, A Fiscal Capacity with Endogenous Access in a Monetary Union. Available at SSRN: https://ssrn.com/abstract=4085362 or http://dx.doi.org/10.2139/ssrn.4085362

Dennis Bonam (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands
0031205242924 (Phone)

Marien Ferdinandusse

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Pascal Jacquinot

affiliation not provided to SSRN ( email )

No Address Available

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