Fiscal Transfers in a Monetary Union with Exit Option
25 Pages Posted: 21 Mar 2015
Date Written: March 19, 2015
It is widely debated whether a monetary union has to be accompanied by a fiscal transfer scheme to accommodate asymmetric shocks. We build a model of a monetary union with a central bank and two heterogeneous countries that are linked by a fiscal transfer scheme with repercussions on monetary policy. A central bank aiming at securing the existence of a monetary union in the presence of asymmetric shocks has to compensate single countries for the tax distortions arising from fiscal transfers. Monetary policy may become more expansionary or restrictive depending on asymmetries between member countries’ inflation aversion and exit costs.
Keywords: monetary union, fiscal transfer scheme, monetary policy, asymmetric shocks, exit
JEL Classification: E520, E630, F330
Suggested Citation: Suggested Citation