Is a fiscal union optimal for a monetary union?

Résumé

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.

Mots-clés

Fiscal Delegation; Fiscal Federalism; Externalities; Public Goods; European; Union Enlargement;

Codes JEL

E6: Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
E61: Policy Objectives • Policy Designs and Consistency • Policy Coordination
E62: Fiscal Policy
E65: Studies of Particular Policy Episodes
F42: International Policy Coordination and Transmission
F45: