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Article

Fiscal Federalism in a Monetary Union: The No-Cooperation Pitfall

The relative merits in a monetary union of a fiscal federalism scheme and
intergovernmental fiscal cooperation without a federal authority are assessed using a standard 
macroeconomic model commonly used for policy analysis. We show that it is impossible to conclude 
that one solution is always preferable to the other. The benefits from an extra instrument and a 
policymaker with union-wide objectives may not compensate the adding of a non-cooperative player to 
the policy game. This result is sustained when an active monetary policy is introduced in the model 
or when shocks afect the functioning of the economy. The welfare ranking of these two options 
depends on the cross-border spillover efects, the objectives of policymakers and the
variances of shocks.