The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area

Loes Verstegen, Lex Meijdam

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages79
Volume2016-023
Publication statusPublished - 21 Jun 2016

Publication series

NameCentER Discussion Paper
Volume2016-023

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Keywords

  • Two-country DSGE
  • Fiscal Federalism
  • Monetary union
  • fiscal policy

Cite this

Verstegen, L., & Meijdam, L. (2016). The Effectiveness of a Fiscal Transfer Mechanism in a Monetary Union: A DSGE Model for the Euro Area. (CentER Discussion Paper; Vol. 2016-023). Tilburg: CentER, Center for Economic Research.