Abstract
Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short-run transitional welfare loss can outweigh the long-run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.
| Original language | English |
|---|---|
| Pages (from-to) | 636-659 |
| Number of pages | 24 |
| Journal | Canadian Journal of Economics |
| Volume | 50 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 2017 Aug 1 |
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ASJC Scopus subject areas
- Economics and Econometrics
Cite this
How much to share : Welfare effects of fiscal transfers. / Kim, Jinill; Kim, Sunghyun.
In: Canadian Journal of Economics, Vol. 50, No. 3, 01.08.2017, p. 636-659.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - How much to share
T2 - Welfare effects of fiscal transfers
AU - Kim, Jinill
AU - Kim, Sunghyun
PY - 2017/8/1
Y1 - 2017/8/1
N2 - Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short-run transitional welfare loss can outweigh the long-run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.
AB - Recent sovereign debt crisis has challenged policy makers to explore the possibility of establishing a fiscal transfer system that could alleviate the negative impact of asymmetric shocks across countries. Using a simple labour production economy, we first derive an analytically tractable solution for optimal degree of fiscal transfers. In this economy, fiscal transfers can improve welfare by moving the competitive equilibrium with fiscal transfers closer to the social planner's solution. We then extend the model to a DSGE setting with capital, international bond and linear taxes, and we analyze how implementation of a simple revenue sharing rule affects welfare and macroeconomic variables over time. Simulation results show that risk sharing through fiscal transfers always improves welfare in the long run. However, under certain model specifications, short-run transitional welfare loss can outweigh the long-run benefits. These results suggest that, in designing fiscal transfers across countries, government should take into consideration the intertemporal nature of welfare gains.
UR - http://www.scopus.com/inward/record.url?scp=85021798261&partnerID=8YFLogxK
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U2 - 10.1111/caje.12273
DO - 10.1111/caje.12273
M3 - Article
AN - SCOPUS:85021798261
VL - 50
SP - 636
EP - 659
JO - Canadian Journal of Economics
JF - Canadian Journal of Economics
SN - 0008-4085
IS - 3
ER -