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

See all articles by Loes Verstegen

Loes Verstegen

Tilburg University

A. C. Meijdam

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Date Written: June 21, 2016

Abstract

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

Suggested Citation

Verstegen, Loes and Meijdam, A.C. (Lex), The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area (June 21, 2016). CentER Discussion Paper Series No. 2016-023, Available at SSRN: https://ssrn.com/abstract=2798617 or http://dx.doi.org/10.2139/ssrn.2798617

Loes Verstegen (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

A.C. (Lex) Meijdam

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 23 85 (Phone)
+31 13 466 30 42 (Fax)

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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