Fiscal Transfers in a Monetary Union with Sovereign Risk

Venue: EUI, Department of Economics

The meeting was composed of two different parts. In the first part, Guilherme de Almeida Bandeira presented his paper “Fiscal Transfers in a Monetary Union with Sovereign Risk”. The work highlights the importance of fiscal transfers as an economic stimulus against the disruptive effects of high sovereign bond spreads on the economy. An increase in sovereign spreads reduces government bonds’ prices held by banks and, as a result, decreases their net worth. Banks respond to this by passing through higher interest rates to firms and, at the same time, by reducing credit supply as a result of binding leverage constraints. Governments can react by implementing an expansionary fiscal policy which, however, comes at the cost of higher government debt, even greater spreads and, hence, an even more fragile banking system. A Fiscal Transfer Scheme (FTS) would instead induce an economic stimulus, and improve welfare, without resulting in higher spreads.

The second part of the meeting was devoted to some clarifications of questions regarding research synergies between partner universities in the ADEMU project, as well as visibility of future scientific work and to some administrative information.