Political economy of fiscal unions

Jan Fidrmuc

European Journal of Political Economy, 2015, vol. 40, issue PA, 147-157

Abstract: Fiscal unions often use fiscal transfers to counter asymmetric shocks, but such transfers may be politically controversial. I present a model of a two-region fiscal union with region-specific shocks where the threat of secession imposes a limit on fiscal redistribution between regions. I show that both correlation of shocks across regions and their persistence over time are important for political support for integration. The gains from inter-regional risk sharing are potentially large when shocks are negatively correlated and temporary. In contrast, unions with negatively correlated permanent shocks are likely to be fragile.

Keywords: Fiscal federalism; Risk sharing; Disintegration; Median voter (search for similar items in EconPapers)
JEL-codes: D70 F59 H77 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Political Economy of Fiscal Unions (2013)
Working Paper: Political Economy of Fiscal Unions (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:40:y:2015:i:pa:p:147-157

DOI: 10.1016/j.ejpoleco.2015.09.002

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