Exchange Rate Adjustment in the Euro Area Cross-regions Transfers in a Monetary Union: Evidence From the US and Implications for Europe CROSS-REGIONS TRANSFERS IN A MONETARY UNION: EVIDENCE FROM THE US AND IMPLICATIONS FOR EUROPE

San Servolo, June, Steven Pennings, Steven Pennings
Transfers to individuals from the federal government vary greatly across states in the US, but are largely absent across countries in the European Monetary Union (EMU). Using exogenous variation in cross-state transfers as part of recent temporary stimulus packages and earlier permanent social security increases, I show that US states receiving larger transfers tend to have faster relative short-term growth in non-transfer income. The results are consistent with an open-economy New Keynesian
more » ... my New Keynesian model. Despite this, the model generates only a small reduction in output volatility if US-style countercyclical cross-region transfers are applied in Europe, especially when compared to the effects of locally-financed countercyclical transfers. JEL: E62, F45, F41 "Some economists...argue that [the] regional insurance scheme provided by the federal government is one of the key reasons why the system of fixed exchange rates within the United States has survived without major problems."