Template-Type: ReDIF-Paper 1.0 Author-Name: Angelo Baglioni Author-X-Name-First: Angelo Author-X-Name-Last: Baglioni Author-Email: angelo.baglioni@unicatt.it Author-Workplace-Name: Universitą Cattolica del Sacro Cuore Author-Workplace-Name: Dipartimento di Economia e Finanza, Universitą Cattolica del Sacro Cuore Author-Name: Andrea Boitani Author-X-Name-First: Andrea Author-X-Name-Last: Boitani Author-Email: andrea.boitani@unicatt.it Author-Workplace-Name: Universitą Cattolica del Sacro Cuore Author-Workplace-Name: Dipartimento di Economia e Finanza, Universitą Cattolica del Sacro Cuore Author-Name: Massimo Bordignon Author-X-Name-First: Massimo Author-X-Name-Last: Bordignon Author-Email: massimo.bordignon@unicatt.it Author-Workplace-Name: Universitą Cattolica del Sacro Cuore Author-Workplace-Name: Dipartimento di Economia e Finanza, Universitą Cattolica del Sacro Cuore Title: Labor mobility and fiscal policy in a currency union Abstract: Labor mobility is commonly taken as a property of an optimal currency area. But how does that property a¤ect the outcome of fiscal policies? We address this issue with a two country ?two period model, where both asymmetric and symmetric productivity shocks may hit the countries. We show that perfect (costless) labour mobility is not necessarily welfare improving, since it prevents the national fiscal authorities from pursuing indepen- dent policies, opening the way to a coordination problem between them, which is particularly relevant when the two countries di¤er for their intertemporal preferences. With symmetric shocks, the federal fiscal policy can improve welfare over national policies by playing a coordinating role. With asymmet- ric shocks, the federal fiscal policy allows both countries to reach a higher productive efficiency; to do that, the federal government must be endowed with a federal budget, playing a stronger role than plain coordination between countries. Length: 37 Creation-Date: 2014-11 File-URL: http://dipartimenti.unicatt.it/economia-finanza-def020.pdf File-Format: Application/pdf File-Function: First version, 2014 Number: def020 Classification-JEL: E62, H77. Keywords: currency union, labor mobility, fiscal policy, federation Handle: RePEc:ctc:serie1:def020