EconPapers    
Economics at your fingertips  
 

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

Timothy Goodspeed ()

No 6118, CESifo Working Paper Series from CESifo Group Munich

Abstract: In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. Given that the EU has established rules limiting deficits, national rainy-day funds could in theory provide a way for countries to obey the rules and use fiscal policy, yet avoid using austerity measures during a recession. The rainy-day fund is self-insurance and we examine the funding of a national rainy-day fund for a country in isolation. We then introduce a fiscal union while allowing member countries to retain some fiscal policy control. 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 funds; fiscal stabilization (search for similar items in EconPapers)
JEL-codes: E60 H10 H60 H70 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
http://www.cesifo-group.de/DocDL/cesifo1_wp6118.pdf (application/pdf)

Related works:
Journal Article: Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union (2016) Downloads
Working Paper: Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in Fiscal Union (2016) Downloads
Working Paper: Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union (2016) 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: https://EconPapers.repec.org/RePEc:ces:ceswps:_6118

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Group Munich Contact information at EDIRC.
Series data maintained by Klaus Wohlrabe ().

 
Page updated 2017-10-15
Handle: RePEc:ces:ceswps:_6118