The role of fiscal policy in a monetary union: are national automatic stabilizers effective?

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(3), pp. 591-610. (doi: 10.1111/j.1467-9396.2008.00747.x)

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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Muscatelli, Professor Anton
• Authors: Colciago, A., Ropele, T., Muscatelli, V.A., and Tirelli, P.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Review of International Economics
• Publisher: John Wiley & Sons Ltd.
• ISSN: 0965-7576
• ISSN (Online): 1467-9396
• Published Online: 08 May 2008