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The Role of Fiscal Policy in a Monetary Union: are National Automatic Stabilizers Effective? *
Author(s) -
Colciago Andrea,
Ropele Tiziano,
Muscatelli V. Anton,
Tirelli Patrizio
Publication year - 2008
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.2008.00747.x
Subject(s) - economics , fiscal policy , dynamic stochastic general equilibrium , new keynesian economics , volatility (finance) , consumption (sociology) , monetary economics , monetary policy , macroeconomics , stabilization policy , wage , inflation (cosmology) , keynesian economics , econometrics , labour economics , social science , physics , sociology , theoretical physics
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.