A Volatility-based Theory of Fiscal Union Formation

Jose Tavares (), Jaime Luque and Massimo Morelli ()

No 2012/21, RSCAS Working Papers from European University Institute

Abstract: In a setting where heterogeneous jurisdictions share a common policy, an increase in volatility breaks unanimous support for the status-quo and may prompt a subset of jurisdictions to favor either deepening the agreement through a fiscal union, or revert to autarky. A reassignment of political weights in the .scal union may restore unanimous support for the common policy. We show how the bargaining space depends on relative country income, size, and cross country correlation of shocks. Finally,we discuss the future of a common currency in Europe and the di¤erent emphasismember countries have put on the choice of fiscal federalism versus autarky.

Date: 2012-05-01
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Working Paper: A Volatility-based Theory of Fiscal Union Formation (2012)
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