Working Paper BETA #2013-19

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Title : Implementing a Fiscal Transfer Mechanism in a Heterogeneous Monetary Union: A DSGE approach.

Author(s) : Thierry Betti

Abstract : This paper deals with the implementation of a fiscal transfer mechanism among countries of a monetary union. I use a DSGE model of a monetary union close to Beetsma and Jensen (2005) and introduce both national fiscal policies and a transfer mechanism. I show the transfer has two effects: an obvious shift in demand but also a destabilizing effect due to a higher degradation of the term of trade for the recipient member. Then, I focus on two structural heterogeneities: the sensitivity to the transfer and the relative size of the two countries. I discuss in what extent these heterogeneities affect the effectiveness of the transfer.

Key-words : fiscal federalism, transfer mechanism, new-Keynesian models, monetary union.

JEL Classification : E32, F77