Political Economy of Fiscal Unions

Jan Fidrmuc

CEDI Discussion Paper Series from Centre for Economic Development and Institutions(CEDI), Brunel University

Abstract: I formulate a political-economy model of a fiscal union where the threat of secession imposes a limit on fiscal redistribution between regions. I argue that the trade-off between implementing the region's preferred fiscal policy and benefiting from inter-regional risk sharing depends on the nature of economic shocks. Specifically both correlation of shocks across regions and their persis- tence over time are important. The gains from inter-regional risk sharing are potentially large when shocks are negatively correlated and temporary. In con- trast, unions with negatively correlated permanent shocks are likely to prove politically unviable.

Pages: 25 pages
Date: 2013-07
New Economics Papers: this item is included in nep-pbe, nep-pol and nep-ure
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Political economy of fiscal unions (2015)
Working Paper: Political Economy of Fiscal Unions (2013)
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