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Abstract
The paper analyzes the usefulness of budgetary cooperation in a monetary union, even if it is limited to a subgroup of countries with close structural characteristics. The author finds that its advantages depend on the nature of the shocks and on the width of the heterogeneities within the monetary union. Budgetary cooperation between countries where the sensitivities of economic activity to public expenditures and to foreign economic activity are sufficiently high, is beneficial to stabilize symmetric demand shocks. It is beneficial to stabilize symmetric supply shocks if it concerns a sufficiently large number of countries. On the contrary, budgetary cooperation is generally detrimental to stabilize asymmetric demand or supply shocks.
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The data set for this article can be found at: http://hdl.handle.net/1902.1/18679
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Reply to Fritz Breuss
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Although this paper claims to use a more flexible model than what was used before, it is still basically a Keynesisn one and this kind of model has many unstated assumptions, which imply that certain variables don't change. In particular the Keynesian model includes the land values within the capital ...[more]
... investments. This is basically wrong, since a reduction in the stock-market yields or dividends results in the land becoming more valuable. Its value is found by "capitalization" of the rent, that is by dividing the rent by the average yield. This variable will not perform in a parallel manner to that of the dividends on the shares.