The Limits to Partial Banking Unions: A Political Economy Approach

Dana Foarta

American Economic Review, 2018, vol. 108, issue 4-5, 1187-1213

Abstract: This paper studies the welfare effects of a "partial banking union" in which cross-country transfers for bailouts are set at the supranational level, but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers compared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.

JEL-codes: D72 E44 E61 G01 G21 G28 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20141388
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Citations: View citations in EconPapers (19)

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