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One EMU Fiscal Policy for the EURO

23 March 2016 at 12:00 PM - 1:30 PM

Room 104, Campus on Viale Romania, 32

Speaker: Cole Alexandre Lucas, LUISS

Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union and study the interaction between the country-specific fiscal policies with different fiscal rules, in a setting where the union-wide monetary policy affects fiscal policies and viceversa, because of price rigidities and distortionary taxation. We calibrate the model to represent two groups of countries in the European Monetary Union and run numerical simulations of the model under a range of alternative shocks and under alternative scenarios for fiscal policy, to study the dynamic responses of the main variables. We study the effects of fiscal policy coordination by evaluating the different outcomes under the Pure Currency Union scenario, the Coordinated Currency Union scenario, and the Full Fiscal Union one, which is considered as an extreme case of fiscal policy coordination. We also evaluate alternative fiscal policy tools for stabilization and alternative schemes to finance the government expenditure. We analyze the differences in fiscal policy multipliers as a case for building an EMU fiscal capacity to address shocks. We also define a welfare criterion and compare welfare under the different scenarios, bringing to policy conclusions for the proper macroeconomic management of a Currency Union