Fiscal Unions

Emmanuel Farhi

No 194, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We study cross-country insurance in a currency union with nominal price and wage rigidities. We provide two results that build the case for the creation of a fiscal union within a currency union. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of insurance is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, private insurance is inefficiently low. A role emerges for government intervention in macro insurance to both guarantee its existence and to influence its operation. The efficient insurance arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies.

Date: 2013
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Related works:
Journal Article: Fiscal Unions (2017)
Working Paper: Fiscal Unions (2017)
Working Paper: Fiscal Unions (2014)
Working Paper: Fiscal Unions (2012)
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