The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area
CentER Discussion Paper Series No. 2016-023
81 Pages Posted: 23 Jun 2016
Date Written: June 21, 2016
In this paper, we incorporate a transfer mechanism into a DSGE model with a rich fiscal sector to assess the effectiveness of fiscal transfers for a monetary union, in particular for the Economic and Monetary Union. Using a heterogeneous setup, the model is estimated for the North and the South of Europe using Bayesian methods. The results show that the transfer mechanism is effective in stabilizing the economy of the southern block of countries during the financial crisis, although the total welfare effect for the EMU is negative, though small. Ex ante, a transfer mechanism would be beneficial for both the North and the South in terms of welfare and stabilization purposes.
Keywords: Two-Country DSGE, Fiscal Federalism, Monetary Union, Fiscal Policy
JEL Classification: E62, E63, F42, F45
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