Is a fiscal union optimal for a monetary union?

Abstract

When is a fiscal union appropriate for a monetary union? In a monetary union without fiscal externalities, when local fiscal authorities have an informational advantage over a central fiscal authority in terms of their knowledge of countries’ preferences for government spending, a decentralized fiscal regime dominates a centralized one. Our novel result is that in the presence of fiscal externalities across countries, however, a decentralized fiscal regime is optimal for small monetary unions, whereas a centralized fiscal regime is optimal for large ones. These results shed new light on the debate on fiscal integration within the EU and its enlargement.

Reference

Rafael Berriel, Eugenia Gonzalez-Aguado, P. Kehoe, and Elena Pastorino, “Is a fiscal union optimal for a monetary union?”, Journal of Monetary Economics, vol. 141, January 2024, pp. 157–177.