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Balanced-budget rules and risk-sharing in a fiscal union

Vladimir Dashkeev and Stephen J Turnovsky ()

Journal of Macroeconomics, 2018, vol. 57, issue C, 277-298

Abstract: This paper addresses the following question: What are the implications of the asymmetry of balanced-budget rules for interregional risk sharing in a fiscal union? We investigate our research question in a two-region, open economy DSGE model that is augmented with the public-sector features of a federal state. The analysis demonstrates that the asymmetry of balanced-budget rules is detrimental for the risk sharing in the union. The degree of risk sharing is a function of the public good productivity, specification of the technology process, and distribution of productivity shocks in the fiscal union.

Keywords: Balanced-budget rule; Fiscal federalism; Fiscal union; Occasionally binding constraints; Productive public expenditures; Risk sharing (search for similar items in EconPapers)
JEL-codes: E62 H60 H74 H77 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:jmacro:v:57:y:2018:i:c:p:277-298