Abstract
Economic integration issue is one of the most important economic issues. In this paper, we consider simple macroeconomic models of two regions to analyse how market integration influences fiscal-monetary policy effects on regional variables, especially regional income. First, we focus on monetary integration. We show that an adoption of a single currency under a fixed exchange rate system strengthens the effect of fiscal expansion in a region on the region's income and weakens the effect on the other region's. We have the opposite results as the above under a flexible one. Second, we focus on regional labor market integration, and have the same results as the above if inflation expectations of workers fail ever to catch up with the actual rate of inflation.
