This paper argues that budget deficits can be used strategically by the government to improve its chance of reelection. Under progressive wealth taxation, Ricardian equivalence fails if individuals have different levels of wealth because a budget deficit redistributes resources from individuals...

We study optimal fiscal policy in a monetary union where monetary policy is decided by an independent central bank. We consider a two-country model with trade in goods and assets, augmented with sticky prices, labor income taxes and stochastic government consumption. It is optimal to finance a...

In the transitional phase towards full economic integration, European countries have the possibility of re-shaping the continental geography of specialization. We develop a two-sector two-country model that shows formally how fiscal policy can be critical in promoting specialization in a phase...