Political Economy of Fiscal Unions

Jan Fidrmuc

No 4344, CESifo Working Paper Series from CESifo

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 persistence over time are important. 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 prove politically unviable.

Keywords: fiscal federalism; risk sharing; disintegration; median voter; optimum currency areas (search for similar items in EconPapers)
JEL-codes: D72 F59 H77 (search for similar items in EconPapers)
Date: 2013
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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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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4344

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