Does Fiscal Policy Help Those Who Need It Most? Evidence from the US and the Eurozone

With a notion that the eurozone does not have a fiscal federalist system, we analyze the effectiveness of fiscal policy at the country level of the eurozone and the state level of the US. Our empirical analysis shows that, not like the case of the US, the role of fiscal policy for counteracting regional income shocks is far weaker in low-income countries in the eurozone. In addition, the contagion effect of fiscal crises in the eurozone is stronger and this effect becomes stronger in the eurozone after the establishment of the European Union. Our finding provides empirical evidence for fiscal problems in a single-currency area without a fiscal federalist system.