We thank Helge Berger, Menzie Chinn, Thomas Moutos, Alessandro Missale, and other participants of CESifo–Delphi Conference “Global Economic Imbalances, Prospect and Remedies” and to the first Piero Moncasca Money-Macro Meeting at the University of Pavia for useful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect those of the Bank of Italy. The usual disclaimer applies.
The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?*
Version of Record online: 8 MAY 2008
© 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd
Review of International Economics
Volume 16, Issue 3, pages 591–610, August 2008
How to Cite
Colciago, A., Ropele, T., Muscatelli, V. A. and Tirelli, P. (2008), The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?. Review of International Economics, 16: 591–610. doi: 10.1111/j.1467-9396.2008.00747.x
- Issue online: 8 JUL 2008
- Version of Record online: 8 MAY 2008
We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DSGE model, incorporating non-Ricardian consumers and a home bias in national consumption. Fiscal policy directly stabilizes non-Ricardian agents' consumption. By doing so it contributes to the reduction in the volatility of variables such as output, wage inflation, and real interest rates. Our analysis of country-specific shocks does not suggest potential inter-country conflicts (as long as policies are constrained within the automatic stabilizers framework). However, we detect a potential conflict between the two consumer groups, because fiscal policy may raise optimizing agents' consumption volatility.