Economics at your fingertips  

Fiscal Unions

Emmanuel Farhi () and Iván Werning

American Economic Review, 2017, vol. 107, issue 12, 3788-3834

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 both to guarantee its existence and to influence its operation. The constrained efficient risk-sharing arrangement can be implemented by contingent transfers within a fiscal union. We find that the benefits of such a fiscal union are larger, the more asymmetric the shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies. Finally, we compare the performance of fiscal unions and of other macroeconomic stabilization instruments available in currency unions such as capital controls, government spending, fiscal deficits, and redistribution.

JEL-codes: E62 F31 F32 F41 F45 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20130817
References: Add references at CitEc
Citations Track citations by RSS feed

Downloads: (external link) (application/pdf) ... FUXUcP11LAQJ9x6s8lD9 (application/zip) ... h1vKSwSMplQ7fy-NC1wT (application/pdf) ... mKSVrKAokRycq9KY7Wo- (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
Working Paper: Fiscal Unions (2017) Downloads
Working Paper: Fiscal Unions (2014) Downloads
Working Paper: Fiscal Unions (2013)
Working Paper: Fiscal Unions (2012) Downloads
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:

Ordering information: This journal article can be ordered from

Access Statistics for this article

American Economic Review is currently edited by Esther Duflo

More articles in American Economic Review from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().

Page updated 2018-12-13
Handle: RePEc:aea:aecrev:v:107:y:2017:i:12:p:3788-3834