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

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.