How much to share: Welfare effects of fiscal transfers

Jinill Kim, Sunghyun Kim

Research output: Contribution to journalArticle

1 Citation (Scopus)

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 languageEnglish
Pages (from-to)636-659
Number of pages24
JournalCanadian Journal of Economics
Volume50
Issue number3
DOIs
Publication statusPublished - 2017 Aug 1

ASJC Scopus subject areas

  • Economics and Econometrics

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