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Monetary union and fiscal federalism

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  • Kletzer, Kenneth M.
  • von Hagen, Jürgen

Abstract

Does a monetary union need fiscal shock absorbers helping the participating countries to cope with asymmetric shocks? The consensus in the debate over EMU argues that the answer is yes. In this paper, we revisit the issue, building on a dynamic, general equilibrium framework of regions in a monetary union exposed to asymmetric shocks. We show that inter-regional taxes and transfers can stabilize regional employment or consumption, but not both. The welfare effects of such stabilization are, however, ambiguous. In contrast to a popular argument in the EMU debate, inter-regional taxes and transfers do not reduce the incentives for goods and labor market deregulation in the regions, provided that the degree of trade integration among the regions is large. There is, however, reason to coordinate regional reform policies to avoid adverse effects on the aggregate performance of the union.

Suggested Citation

  • Kletzer, Kenneth M. & von Hagen, Jürgen, 2000. "Monetary union and fiscal federalism," ZEI Working Papers B 01-2000, University of Bonn, ZEI - Center for European Integration Studies.
    • Handle: RePEc:zbw:zeiwps:b012000
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    Cited by:

    1. Ansgar Belke & Frank Baumgärtner, 2002. "Fiskalische Transfermechanismen und asymmetrische Schocks in Euroland," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 71(3), pages 384-399.
    2. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
    3. Bird, Richard M. & Smart, Michael, 2002. "Intergovernmental Fiscal Transfers: International Lessons for Developing Countries," World Development, Elsevier, vol. 30(6), pages 899-912, June.
    4. Michael Evers, 2006. "Federal fiscal transfers in monetary unions: A NOEM approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(4), pages 463-488, August.
    5. Thomas Uril, 2001. "Avoiding excessive deficits with fiscal coordination light," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 36(6), pages 281-285, November.
    6. Charles Wyplosz, 2002. "Fiscal Policy: Institutions vs. Rules," IHEID Working Papers 03-2002, Economics Section, The Graduate Institute of International Studies.
    7. Ralf Hepp & Jürgen von Hagen, 2012. "Fiscal Federalism in Germany: Stabilization and Redistribution Before and After Unification," Publius: The Journal of Federalism, CSF Associates Inc., vol. 42(2), pages 234-259, April.
    8. Mariano Tommasi & Miguel Braun, 2002. "Fiscal Rules for Subnational Governments. Some Organizing Principles and Latin American Experiences," Working Papers 44, Universidad de San Andres, Departamento de Economia, revised Mar 2002.
    9. Eduard Hochreiter & Anton Korinek & Pierre L. Siklos, 2003. "The potential consequences of alternative exchange rate regimes: A study of three candidate regions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(4), pages 327-349.
    10. Shah, Anwar, 2005. "Fiscal decentralization and fiscal performance," Policy Research Working Paper Series 3786, The World Bank.
    11. Fujiki, Hiroshi & Otani, Akira, 2002. "Do Currency Regimes Matter in the 21st Century? An Overview," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 47-79, December.
    12. Uhlig, Harald, 2002. "One Money, but Many Fiscal Policies in Europe: What Are the Consequences?," CEPR Discussion Papers 3296, C.E.P.R. Discussion Papers.
    13. Tomasz Michalak & Jacob Engwerda & Joseph Plasmans, 2009. "Strategic Interactions between Fiscal and Monetary Authorities in a Multi-Country New-Keynesian Model of a Monetary Union," CESifo Working Paper Series 2534, CESifo.
    14. Clemens Fuest & Andreas Peichl, 2012. "European Fiscal Union: What Is It? Does It work? And Are There Really 'No Alternatives'?," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 13(01), pages 03-09, April.
    15. István Benczes, 2001. "Stability Pact for Hungary? Rise of Third Generation Reforms," CERT Discussion Papers 0103, Centre for Economic Reform and Transformation, Heriot Watt University.
    16. Kenneth Kletzer, 2006. "Taxes and stabilization in contemporary macroeconomic models," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 13(4), pages 351-371, August.
    17. Isidoro Mazza & Frans Winden, 2002. "Does Centralization Increase the Size of Government? The Effects of Separation of Powers and Lobbying," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 9(4), pages 379-389, August.
    18. Siebert, Horst, 2000. "The Euro: The issues for the future," Kiel Discussion Papers 361, Kiel Institute for the World Economy (IfW Kiel).

    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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