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

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  • Andrea Colciago
  • Tiziano Ropele
  • V. Anton Muscatelli
  • Patrizio Tirelli

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.

Suggested Citation

  • Andrea Colciago & Tiziano Ropele & V. Anton Muscatelli & Patrizio Tirelli, 2008. "The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective?," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 591-610, August.
    • Handle: RePEc:bla:reviec:v:16:y:2008:i:3:p:591-610
    DOI: 10.1111/j.1467-9396.2008.00747.x
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