New deliverable by LUISS published: “One EMU Fiscal Policy for the EURO”

A new deliverable by LUISS has been published: One EMU Fiscal Policy for the EURO (D3.2).

Abstract: We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union to study the effects of fiscal policy coordination, by evaluating the stabilization properties of different fiscal policy scenarios. Our main findings are the following: a) a government spending rule that targets net exports rather than domestic output produces more stable dynamics, b) consolidating government budget constraints across countries and moving tax rates jointly provides greater stabilization than with separate budget constraints and independent tax rate movements, c) taxes on labour income are exponentially more distortionary than taxes on firm sales. These findings point out to possible policy prescriptions for the Eurozone: to coordinate fiscal policies by reducing international demand imbalances, either by stabilizing trade flows across countries or by creating some form of fiscal union or both, while avoiding the excessive use of labour taxes, in favour of sales taxes.