Monetary and fiscal policies interactions in a monetary union with country-size asymmetry

Within a country-size asymmetric monetary union, idiosyncratic shocks and national fiscal stabilization policies cause asymmetric cross-border effects. These effects are a source of strategic interactions between noncoordinated fiscal and monetary policies: on the one hand, due to larger externalities imposed on the union, large countries face less incentives to develop free-riding fiscal policies; on the other hand, a larger strategic position vis-à-vis the central bank incentives the use of fiscal policy to, deliberately, influence monetary policy. Additionally, the existence of non-distortionary government financing may also shape policy interactions. As a result, optimal policy regimes may diverge not only across the union members, but also between the latter and the monetary union. In a two-country micro-founded New-Keynesian model for a monetary union, we consider two fiscal policy scenarios: (i) lump-sum taxes are raised to fully finance the government budget and (ii) lump-sum taxes do not ensure balanced budgets in each period; therefore, fiscal and monetary policies are expected to impinge on debt sustainability. For several degrees of country-size asymmetry, we compute optimal discretionary and dynamic non-cooperative policy games and compare their stabilization performance using a union-wide welfare measure. We also assess whether these outcomes could be improved, for the monetary union, through institutional policy arrangements. We find that, in the presence of government indebtedness, monetary policy optimally deviates from macroeconomic to debt stabilization. We also find that policy cooperation is always welfare increasing for the monetary union as a whole; however, indebted large countries may strongly oppose to this arrangement in favour of fiscal leadership. In this case, delegation of monetary policy to a conservative central bank proves to be fruitful to improve the union’s welfare.

Do economic and financial firm's situation affect the quality if financial reports?

We investigate whether firms’ economic and financial situation influence the Quality of their Financial Reports (FRQ). FRQ is fundamental for investors and it affects the international capital movements [Bradshaw et al. (2004)] and Gelos and Wei (2005)]. Following Schipper and Vicent (2003) we use two issues to access earnings quality: abnormal accruals and earnings persistence. For seventeen European countries, we find evidence that the economic performance affects FRQ. Big firms and those with high current earnings exhibit better financial information. These results are robust since they don’t depend on FRQ proxy and we have the same evidence when we estimate regression with economical and financial factors separately or together. About financial situation, it seems not to affect FRQ. However, in high leveraged firms, the capital structure becomes determinant.