Working Paper: CEPR ID: DP2615
Authors: Kenneth Kletzer; Jürgen von Hagen
Abstract: Does a monetary union need fiscal shock absorbers helping the participating countries to cope withasymmetric 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 unionexposed to asymmetric shocks. We show that inter-regional taxes and transfers can stabilize regionalemployment or consumption, but not both. The welfare effects of such a stabilization are, however,ambiguous. In contrast to a popular argument in the EMU debate, inter-regional taxes and transfers do notreduce the incentives for goods and labour market deregulation in the regions, provided that the degree oftrade integration among the regions is large. There is, however, reason to coordinate regional reform policiesto avoid adverse effects on the aggregate performance of the union.
Keywords: monetary union; regional employment stabilization; regional insurance
JEL Codes: E42; E63; F33; F42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| interregional taxes and transfers (H87) | regional employment stabilization (J68) |
| interregional taxes and transfers (H87) | regional consumption stabilization (R22) |
| interregional taxes and transfers (H87) | regional employment and consumption (not both) (R22) |
| interregional taxes and transfers (H87) | private consumption destabilization (E21) |
| interregional taxes and transfers (H87) | public spending destabilization (H69) |
| direct transfers to households (H53) | reverse long-run effects of asymmetric productivity shocks (O49) |
| intergovernmental transfers (H77) | long-run effects of asymmetric productivity shocks unchanged (O49) |
| magnitude of transfers (F16) | overall economic performance (P47) |
| structural reform policies (E69) | benefits from transfer schemes (F16) |
| labor market reforms (J48) | disincentives for regional governments to pursue reforms (H10) |