Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union

Timothy Goodspeed ()

FinanzArchiv: Public Finance Analysis, 2016, vol. 72, issue 4, 407-420

Abstract: In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. We find that moral hazard leads to lower contributions to a rainy day fund with a fiscal union present, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. The optimal size of the fiscal union trades-off the ex-post insurance provided by the union and the moral hazard which reduces national ex-ante preparation for stabilization policies. Optimally, the insurance provided by the fiscal union should be lower (1) the more effective is own-fiscal policy; (2) the more the presence of the fiscal union reduces rainy-day fund savings; (3) the lower is the relative probability of recession; and (4) the lower is the utility gain of redistribution in the union. We also find that commitment to a transfer policy is essential. A fiscal union that is prone to break the rules on transfers negatively impacts the ex-ante contributions to individual members' rainy day funds.

Keywords: fiscal union; fiscal transfers; federation; rainy-day fund; fiscal stabilization (search for similar items in EconPapers)
JEL-codes: E6 H1 H6 H7 (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union (2016)
Working Paper: Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in Fiscal Union (2016)
Working Paper: Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union (2016)
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DOI: 10.1628/001522108X14785541073025

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