Fiscal stabilisation in monetary unions


Nikolov P. and Pasimeni P. (2019) Fiscal Stabilisation in Monetary Unions, VOXEU, CEPR, December 11, 2019.

Following the Great Recession, Europe is once again debating the use of fiscal instruments for macroeconomic stabilisation, with the experience of a monetary union with common fiscal shock absorbers, such as in the US, as a reference. Research on fiscal stabilisation and risk-sharing in the US was originally a reference for Economic and Monetary Union (EMU). Sachs and Sala-i-Martin (1992), Von Hagen (1992), and Bayoumi and Masson (1995) proposed different approaches to quantify the role of fiscal transfers in the US for redistribution and risk sharing, and to draw lessons for the forthcoming EMU. But the EMU does not represent one country or a political union, and so the option of fiscal transfers is constrained. 

Our recent work (Nikolov and Pasimeni 2019) expands this research in three ways:

  • We measure stabilisation not only as inter-state risk-sharing of asymmetric shocks, but also as intertemporal stabilisation of common shocks.
  • We do this for several items in the US federal budget, both on the revenue and on the expenditure side.
  • We also measure the impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession.