Dmitriev, MikhailHoddenbagh, Jonathan2018-09-262018-09-262018-04http://hdl.handle.net/10230/35498We derive the optimal fiscal transfer scheme for countries in a monetary union to off-set the welfare losses resulting from asymmetric shocks and nominal rigidities. Optimal transfers involve a trade-off between reducing national output gaps and the provision of consumption insurance across countries, where the weight of the former increases relative to the latter as consumption home bias rises. The welfare gains from optimal transfers increase in both home bias and export substitutability. When these parameters are calibrated to the data for specific euro area countries, the welfare gains from optimal transfers are as high as 3.6% of permanent consumption.application/pdfengThis is an Open Access article distributed under the terms of the Creative Commons Attribution License Creative Commons Attribution 4.0 International, which permits unrestricted use, distribution and reproduction in any medium provided that the original work is properlyattributed.Fiscal unionCurrency unionMonetary unionOptimal fiscal policyinfo:eu-repo/semantics/workingPaperinfo:eu-repo/semantics/openAccess