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

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  • Dashkeev, Vladimir V
  • Turnovsky, Stephen J

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.

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  • Dashkeev, Vladimir V & Turnovsky, Stephen J, 2018. "Balanced-budget rules and risk-sharing in a fiscal union," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 277-298.
    • Handle: RePEc:eee:jmacro:v:57:y:2018:i:c:p:277-298
    DOI: 10.1016/j.jmacro.2018.06.008
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    More about this item

    Keywords

    Balanced-budget rule; Fiscal federalism; Fiscal union; Occasionally binding constraints; Productive public expenditures; Risk sharing;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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