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.
|Place of Publication||Tilburg|
|Publisher||CentER, Center for Economic Research|
|Number of pages||79|
|Publication status||Published - 21 Jun 2016|
|Name||CentER Discussion Paper|
- Two-country DSGE
- Fiscal Federalism
- Monetary union
- fiscal policy
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.