2016-02-22Buch DOI: 10.18452/4618
Budget-neutral fiscal rulestargetinginflation differentials
In light of persistent in ation dispersion and rising debt levels in the EMU, this paper investigates the welfare implications of budget-neutral fiscal policies that counteract in ation differentials. In a two-country DSGE model of a monetary union with traded and non-traded goods a national fiscal authority is able to reduce welfare losses arising from asymmetric shocks by following a Taylor-type rule for consumption taxes while using labour income taxes to balance its budget. Under technology and government spending shocks welfare losses can be reduced by up to 15%.
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