Coordination of Fiscal Policies and Financial Unions
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In a recent Staff Report published by the Federal Reserve Bank of Minneapolis, Patrick Kehoe and Elena Pastorino suggest that sophisticated international financial markets eliminate the need for a union-wide authority with the role of orchestrating fiscal transfers between countries.
When a monetary union is established, a classic question arises: How should the fiscal policies of member countries be coordinated? In particular, is it desirable to establish a union-wide authority to coordinate the fiscal policies of member countries as well as to implement international fiscal transfers between them? Amid the recent debate about the desirability of greater fiscal integration within the European Union, this question has regained center stage.
In the report, Kehoe and Pastorino also explore situations where a union-wide authority may be beneficial, such as when when individual countries are either unable or unwilling to pursue desirable policies.
Elena Pastorino is an assistant professor of economics at the University of Minnesota.