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 within fiscal unions, like the cases of Scotland in Great Britain or Catalonia in Spain, are arising. 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 southern Europe 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. 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 in particular revenue multipliers tend to be larger in more decentralized countries. The second part of the paper includes 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 chapter explores the relation between the degree of decentralization of a country and its level of debt. Contrary to the current literature and the prevailing public opinion, a panel data analysis of 31 European countries over a 12 year period shows higher levels of regional decentralization have no effect on the levels of debt, even though it affects their spending and taxation income.