The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective?

55 Pages Posted: 31 Mar 2006

See all articles by Andrea Colciago

Andrea Colciago

De Nederlandsche Bank - Research Department; Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS); Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Anton Muscatelli

University of Glasgow - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Tiziano Ropele

Università degli Studi di Milano-Bicocca

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DGE model which incorporates non-Ricardian consumers (as in Gali et al. 2004) and a home bias in the composition of national consumption bundles. We find that fiscal policies stabilize the aggregate economy but, in some cases, generate conflicting views among national policymakers. Finally, model determinacy requires that national fiscal feedbacks on debt accumulation be designed with reference to the debt dynamics of the entire monetary union. This is in sharp contrast with the Brussels consensus based on the view that the ECB alone should stabilize the union-wide economy and national fiscal policies should react to idiosyncratic shocks and to national debt levels.

JEL Classification: E58, E62, E63

Suggested Citation

Colciago, Andrea and Muscatelli, Vito Anton and Ropele, Tiziano and Tirelli, Patrizio, The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective? (March 2006). CESifo Working Paper Series No. 1682, Available at SSRN: https://ssrn.com/abstract=894205

Andrea Colciago

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Vito Anton Muscatelli (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

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

Poschinger Str. 5
Munich, DE-81679
Germany

Tiziano Ropele

Università degli Studi di Milano-Bicocca ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, Milan 20126
Italy

Patrizio Tirelli

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

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