Price differentials in monetary unions: The role of fiscal shocks

Fabio Canova, Evi Pappa

Research output: Contribution to journalArticleResearchpeer-review

68 Citations (Scopus)


We study the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries. We identify shocks using sign restrictions on the dynamics of expenditures, revenues, deficits and output and construct two estimates for structural price differentials dynamics, one for the average and one for each unit, which optimally weight information contained in the data for all units. On average, expansionary fiscal disturbances produce positive, while distortionary balance budget shocks produce negative price differential responses. The negative price differentials responses in some units is partially explained by spillovers and labour supply effects. © 2007 The Author(s). Journal compilation © Royal Economic Society 2007.
Original languageEnglish
Pages (from-to)713-737
JournalEconomic Journal
Issue number520
Publication statusPublished - 1 Jan 2007


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