Fiscal stabilisation in monetary unions

Plamen Nikolov and Paolo Pasimeni in this piece:

In the EMU fiscal transfers are constrained by the lack of a political union, but we find that fiscal stabilisation through a common budget is relevant in a monetary union. There is a case for addressing both common and asymmetric shocks, but the instruments we choose will have different capacities to address these stabilisation needs. 

The design of the budget, in particular the balance of revenue and expenditure, can maximise its stabilisation effect. The key is to bridge the gap between higher mobility of capital and lower mobility of labour, by collecting revenues based on the income of the most mobile factor (corporate income tax) and providing support to the income of the least mobile factor (social security).

A discretionary program of extended unemployment benefits, mainly funded by the federal level and supported by the borrowing capacity of the federal government, proves a powerful example of a timely and effective stabilisation instrument when we require a specific, contingent stabilisation function.

Hmm..But how to have a common budget?

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