Fiscal Unions

Emmanuel Farhi and Iván Werning

Working Paper from Harvard University OpenScholar

Abstract: We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of aggregate risk sharing is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, privately optimal risk sharing is constrained inefficient. A role emerges for government intervention in risk sharing to both guarantee its existence and to influence its operation. The constrained efficient risk sharing arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies.

Date: 2017-01
New Economics Papers: this item is included in nep-eec and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://scholar.harvard.edu/farhi/node/198816

Related works:
Journal Article: Fiscal Unions (2017)
Working Paper: Fiscal Unions (2014)
Working Paper: Fiscal Unions (2013)
Working Paper: Fiscal Unions (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qsh:wpaper:198816

Access Statistics for this paper

More papers in Working Paper from Harvard University OpenScholar Contact information at EDIRC.
Bibliographic data for series maintained by Richard Brandon ( this e-mail address is bad, please contact ).