Monetary unions with heterogeneous fiscal space

Bellifemine, Marco, Couturier, Adrien and Jamilov, Rustam (2025) Monetary unions with heterogeneous fiscal space. Journal of International Economics, 156. ISSN 0022-1996

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Abstract

This paper develops a multi-country Heterogeneous-Agent New Keynesian (HANK) model of a monetary union with ex-ante heterogeneity in legacy public debt across member states. We calibrate the model to the euro area and show that, following symmetric aggregate shocks, the systematic monetary policy reaction induces heterogeneous national outcomes, driven by differences in fiscal space. This generates a trade-off between union-wide macroeconomic stabilization and cross-country synchronization of economic activity for the central bank. We characterize a possibility frontier between union-wide inflation stability and cross-country synchronization, which is traced out by varying the degree of the central bank's hawkishness towards inflation. We study the role of deficit caps, fiscal and political unions, and augmented Taylor rules as instruments to navigate the stabilization–synchronization trade-off.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Economics LSE
Subjects:	H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission
Date Deposited:	27 May 2025 13:21
Last Modified:	11 Sep 2025 12:24
URI:	http://eprints.lse.ac.uk/id/eprint/128186

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