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

Authors

  • Andrea Colciago,

    Corresponding author
    1. Dipartimento di Economia Politica, Università di Milano Bicocca, Italy
      Colciago (corresponding author): Dipartimento di Economia Politica, Università di Milano Bicocca, Piazza dell'Ateneo Nuovo, 20126, Milano, Italy. Tel: +39-02-6448-3051; E-mail: andrea.colciago@unimib.it. Ropele: University of Milano-Bicocca and Bank of Italy. Muscatelli: Heriot-Watt University and CESifo, Munich. Tirelli: University of Milano-Bicocca.
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  • Tiziano Ropele,

    Corresponding author
    1. University of Milano-Bicocca and Bank of Italy
      Colciago (corresponding author): Dipartimento di Economia Politica, Università di Milano Bicocca, Piazza dell'Ateneo Nuovo, 20126, Milano, Italy. Tel: +39-02-6448-3051; E-mail: andrea.colciago@unimib.it. Ropele: University of Milano-Bicocca and Bank of Italy. Muscatelli: Heriot-Watt University and CESifo, Munich. Tirelli: University of Milano-Bicocca.
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  • V. Anton Muscatelli,

    Corresponding author
    1. Heriot-Watt University and CESifo, Munich
      Colciago (corresponding author): Dipartimento di Economia Politica, Università di Milano Bicocca, Piazza dell'Ateneo Nuovo, 20126, Milano, Italy. Tel: +39-02-6448-3051; E-mail: andrea.colciago@unimib.it. Ropele: University of Milano-Bicocca and Bank of Italy. Muscatelli: Heriot-Watt University and CESifo, Munich. Tirelli: University of Milano-Bicocca.
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  • Patrizio Tirelli

    Corresponding author
    1. University of Milano-Bicocca
      Colciago (corresponding author): Dipartimento di Economia Politica, Università di Milano Bicocca, Piazza dell'Ateneo Nuovo, 20126, Milano, Italy. Tel: +39-02-6448-3051; E-mail: andrea.colciago@unimib.it. Ropele: University of Milano-Bicocca and Bank of Italy. Muscatelli: Heriot-Watt University and CESifo, Munich. Tirelli: University of Milano-Bicocca.
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  • 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.

Colciago (corresponding author): Dipartimento di Economia Politica, Università di Milano Bicocca, Piazza dell'Ateneo Nuovo, 20126, Milano, Italy. Tel: +39-02-6448-3051; E-mail: andrea.colciago@unimib.it. Ropele: University of Milano-Bicocca and Bank of Italy. Muscatelli: Heriot-Watt University and CESifo, Munich. Tirelli: University of Milano-Bicocca.

Abstract

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.

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