Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind...

This paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy. We study the interaction between regional fiscal policy and inflation differentials in a flexible-price, two-region model with...