2023/19 | LEM Working Paper Series | ||||||||||||||||
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Fiscal Transfers and Common Debt in a Monetary Union: A Multi-Country Agent Based-Stock Flow Consistent Model |
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Alessandro Caiani and Ermanno Catullo |
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Keywords | |||||||||||||||||
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Fiscal Transfer Union; Union Bonds; European Integration; Agent Based Macroeconomics; Stock Flow Consistent Models.
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JEL Classifications | |||||||||||||||||
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F45, F41, C63
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Abstract | |||||||||||||||||
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Using a refined version of the multi-country AB-SFC model of a Monetary Union already
presented in Caiani et al. (2018a, 2019) the paper aims at providing a tentative assessment
of the economic effects of transforming the European Monetary Union into an Intergovernmental
Fiscal Transfer Union (IFTU) with its own fiscal capacity. Countries contribute
proportionally to their GDP whereas funds are redistributed according to a mechanism that
gives more funds to countries performing worse than the average of the Union in cyclical
terms. Our simulations show that an IFTU inspired by such a redistribution principle acts
as a stabilizer of international trade, allowing to stabilize and improve the Union GDP
performance without affecting the stability of public finances. When the Union is allowed to
borrow on capital markets, i.e. in a Fully-Fledged Fiscal Transfer Union (FFFTU), these
effects are enhanced and a part of the public debt burden shifts from the national to the
Union level, leaving the total burden almost stable. An interesting result to assess the
political acceptability of the proposal is that 'core' countries eventually benefit the most
from the introduction of this mechanism, despite being more frequently net contributors.
Finally, we show that an FFFTU with common debt might help to soften the impact of an
exogenous demand shock while, because of the fact that it mainly operates as a stabilizer of
aggregate demand, it does not seem to provide beneficial effects when facing a supply shock
to production.
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