Faculty of Economics and Business Administration Publications Database

Federal Fiscal Transfers in Monetary Unions: A NOEM Approach

Volume: 13
Number: 4
Pages: 462 - 488
Month: August
ISSN-Print: 0927-5940
Link External Source: Online Version
Year: 2006
Keywords: Monetary union; Asymmetric productivity and demand shocks; Regional economic stabilization; Federal fiscal arrangements

In the debate over EMU, a widely accepted view is that a federal fiscal mechanism is needed for the participating states to cope with asymmetric shocks. In this paper, we explore the properties of federal fiscal transfer schemes with regard to their capability to stabilize national consumption, production and employment. We consider direct transfers among private sectors and indirect transfers among national fiscal authorities. We show that federal fiscal arrangements can provide perfect insurance. Our analysis builds on the New Open Economy Macroeconomics framework which allows us to portray the transmission of shocks and the properties of transfers in detail.