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Horizontal Transfers and Consumption Smoothing in a Monetary Union

Author

Listed:
  • Roeger Werner
  • Vogel Lukas

    (DG Economic and Financial Affairs, European Commission, CHAR 14/233, B-1049Brussels, Belgium)

Abstract

The paper investigates the impact of automatic horizontal fiscal transfers on risk sharing and consumption smoothing in a 2-country DSGE model of monetary union. In particular, it uses the Asdrubali et al. (1996) approach to quantify and decompose the strength of consumption smoothing. The system of horizontal transfers between member countries has no borrowing capacity and, hence, needs to be balanced in every period in time. The transfers increase the fiscal space of national governments in (relatively) adverse situations, i. e. when the budget balance deteriorates (falling tax revenue, higher expenditure) and debt issuance is costly or constrained. The simulation results illustrate the smoothing capacity of horizontal transfers, but also suggest a significant degree of crowding-out of alternative risk sharing channels. Consequently, net stabilisation gains in the “normal times” scenario are small. Net gains increase when financial constraints in the recipient country tighten at the national level.

Suggested Citation

  • Roeger Werner & Vogel Lukas, 2017. "Horizontal Transfers and Consumption Smoothing in a Monetary Union," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 237(3), pages 275-294, June.
    • Handle: RePEc:jns:jbstat:v:237:y:2017:i:3:p:275-294:n:14
    DOI: 10.1515/jbnst-2017-1107
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    Cited by:

    1. Bofinger, Peter & Feld, Lars P. & Schmidt, Christoph M. & Schnabel, Isabel & Wieland, Volker, 2018. "Vor wichtigen wirtschaftspolitischen Weichenstellungen. Jahresgutachten 2018/19 [Setting the Right Course for Economic Policy. Annual Report 2018/19]," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201819.
    2. Enders, Zeno & Vespermann, David, 2024. "Cross-country unemployment insurance, transfers, and trade-offs in international risk sharing," Journal of Monetary Economics, Elsevier, vol. 147(S).
    3. Giovannini, Alessandro & Ioannou, Demosthenes & Stracca, Livio, 2022. "Public and private risk sharing: friends or foes? The interplay between different forms of risk sharing," Occasional Paper Series 295, European Central Bank.

    More about this item

    Keywords

    Horizontal transfers; monetary union; risk sharing; consumption smoothing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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