Fiscal Unions Redux

Patrick Kehoe

No 1712, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance across member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.

Keywords: Cross-country Externalities; Cross-country Insurance; Cross-country Transfers; Fiscal Externalities; International Financial Markets; International Transfers; Optimal Currency Area (search for similar items in EconPapers)
JEL-codes: E60 E61 F33 F35 F38 F42 G15 G28 G33 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2017-02
New Economics Papers: this item is included in nep-dge, nep-ias, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Fiscal unions redux (2017)
Working Paper: Fiscal unions redux (2017)
Working Paper: Fiscal Unions Redux (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:1712

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