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Beetsma, debrun & klaassen (2001)

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Beetsma

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Beetsma, debrun & klaassen (2001)

  1. 1. Main point (aim) of the paper  The EMU as a monetary union has benefits but the biggest cost is that countries cannot use their monetary policy anymore; which is now governed by the ECB  exchange rate adjustments impossible.  Should be no problem if labor mobility is high.  Unfortunately, labor mobility is quite low and investors also remain focused locally.  Alternatives focus on centralization of tax-transfer systems and cross-border fiscal transfers  also rather unlikely.  Most likely solution: Fiscal policy.  How can fiscal policy stabilize country-specific economic disturbances in the EMU?
  2. 2. Methodology Two-country model with direct spillovers stemming from trade linkages and real-exchange rate variations. Consider best responses of countries using game theory: Nash equilibrium and Stackelberg model (first- mover advantage)
  3. 3. Results  Fiscal coordination efforts not based on a strong pre- commitment capacity of the fiscal authorities (Nash coordination) are likely to be counterproductive.  Fiscal coordination is most likely to be desirable when the European economy is hit by asymmetric (demand or supply) disturbances.  This is contrary to current research which shows that fiscal coordination is required in cases of large symmetric shocks.
  4. 4. Centralized fiscal policy: Solution  We can use the basic conclusions from this paper in creating a rationale for the use of fiscal policy, but we need to be careful in accepting all of its conclusions.  Authors have built a model which can have assumptions that are faulty and thus predict wrongly.  However, it does give an insight in the commitment governance systems must show in order to let fiscal policy work well.
  5. 5. Understanding the paper How do the authors combine the two-period model to game theory and consequently find the Nash coordination and Stackelberg equilibrium? (theoretical model)
  6. 6. Remarks from NB  Page 4: “This is especially the case when shocks are highly correlated between countries. Ironically thus, fiscal coordination is most likely to be undesirable when a set of countries form an optimum currency area.”  Comment: This seems to be a contradiction. One aspect of the OCA-theory is implementing a fiscal transfer system among member states to make up for the loss of monetary policy autonomy.

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