Essays on Fiscal and Monetary Unions

Abstract

Are we better together? Versions of this question have been heard repeatedly around Europe on the aftermath of the Great Recession. On the Eurozone, the suboptimal design of the monetary union has contributed to create imbalances before the crisis and slow recoveries after it. Meanwhile, tensions are arising in some fiscal unions within the European Union, like the cases of Scotland in Great Britain or Catalonia in Spain. On this thesis, I discuss three topics on monetary and fiscal unions. The first chapter examines the effect of monetary unions on the competitiveness of its members. In this paper, I explore the effect of the robust increase in public wages following the introduction of the Euro on the overall loss of competitiveness of the economies of the Eurozone periphery during the past decade. To that end, I simulate the drop on interest rates (risk premium) that these countries experienced just before the introduction of the common currency within a DGSE model with search and matching frictions and two sectors. I find that around 15% of the total increase in private wages during the 1999-2007 period can be attributed to the public wage channel, a mechanism described in the chapter. Then, I turn my attention to fiscal unions. The second paper, joint with Reinhard Ellwanger, explores the relationship between fiscal decentralization and fiscal policy effects. We document a positive relationship between decentralization and the effectiveness of fiscal policy: on average, spending and revenue multipliers tend to be larger in more decentralized countries. The second part of the paper is a case study for the decentralization process in Spain. Using the narrative approach, we find that shocks to decentralization have a positive impact on subsequent output growth, particularly for the decentralization of direct taxation competences. Finally, the third