Fiscal Transfers in a Monetary Union with Exit Option

20 Pages Posted: 20 Jul 2015

See all articles by Carsten Hefeker

Carsten Hefeker

HWWA Institute of International Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Michael Neugart

Technical University of Darmstadt

Multiple version iconThere are 2 versions of this paper

Date Written: August 2015

Abstract

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.

Suggested Citation

Hefeker, Carsten and Neugart, Michael, Fiscal Transfers in a Monetary Union with Exit Option (August 2015). Review of International Economics, Vol. 23, Issue 3, pp. 489-508, 2015, Available at SSRN: https://ssrn.com/abstract=2632752 or http://dx.doi.org/10.1111/roie.12182

Carsten Hefeker (Contact Author)

HWWA Institute of International Economics ( email )

Heimhuder Strasse 71
20347 Hamburg, DE Hamburg 20148
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Michael Neugart

Technical University of Darmstadt ( email )

Hochschulstra├če 1
Darmstadt, 64289
Germany

HOME PAGE: http://www.vwl3.wi.tu-darmstadt.de

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