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Stochastic Shocks and Incentives for (Dis)Integration

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Author Info
Fidrmuc, Jan

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Abstract

I present a political economy model of limits to regional redistribution under the threat of secession. The model depicts a union composed of two regions with centralized fiscal policy. The key feature is the trade off between the benefits of secession embodied by autonomous fiscal policy, and the benefits of integration --- efficiency gains and risk sharing. I argue that previously stable unions may disintegrate in response to specific patterns of region-specific output shocks. The decision on secession depends on correlation and persistence of shocks. Integration is sustainable if the shocks are positively correlated and/or transient. On the other hand, the combination of negative correlation and high persistence of the shocks makes integration fragile. Benefits from risk sharing are greatest when shocks are negatively correlated and transient.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2104.

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Date of creation: Mar 1999
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Handle: RePEc:cpr:ceprdp:2104

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Related research
Keywords: Central and Eastern Europe; Disintegration; Median Voter; Optimum Currency Areas; Risk Sharing;

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Find related papers by JEL classification:
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
F2 - International Economics - - International Factor Movements and International Business
H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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  1. Bolton, Patrick & Roland, Gerard, 1997. "The Breakup of Nations: A Political Economy Analysis," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1057-90, November.
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  2. Alesina, A. & Perotti, R., 1995. "Economic Risk and Political Risk in Fiscal Unions," Discussion Papers 1995_29, Columbia University, Department of Economics.
  3. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May. [Downloadable!] (restricted)
  4. Dixit, Avinash & Londregan, John, 1998. "Fiscal federalism and redistributive politics," Journal of Public Economics, Elsevier, vol. 68(2), pages 153-180, May. [Downloadable!] (restricted)
  5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  6. Funke, Michael, 1997. "The Nature of Shocks in Europe and in Germany," Economica, London School of Economics and Political Science, vol. 64(255), pages 461-69, August. [Downloadable!] (restricted)
  7. Rodrik, Dani, 1999. " Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses," Journal of Economic Growth, Springer, vol. 4(4), pages 385-412, December. [Downloadable!] (restricted)
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  8. Bolton, Patrick & Roland, Gerard & Spolaore, Enrico, 1996. "Economic theories of the break-up and integration of nations," European Economic Review, Elsevier, vol. 40(3-5), pages 697-705, April. [Downloadable!] (restricted)
  9. Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Alberto Alesina & Reza Baqir & William Easterly, 1997. "Public Goods and Ethnic Divisions," NBER Working Papers 6009, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Fidrmuc, J. & Horvath, J., 1998. "Stability of monetary unions : lessons from the break-up of Czechoslovakia," Discussion Paper 74, Tilburg University, Center for Economic Research. [Downloadable!]
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  13. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October. [Downloadable!] (restricted)
  14. Alberto Alesina & Roberto Perotti, 1995. "Economic Risk and Political Risk in Fiscal Unions," NBER Working Papers 4992, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Alesina, Alberto & Spolaore, Enrico, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1027-56, November.
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  16. Alberto Alesina & Enrico Spolaore, 1996. "International Conflict, Defense Spending and the Size of Countries," NBER Working Papers 5694, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Frankel, J-A & Rose, A-K, 1996. "Economic Structure and the Decision to Adopt a Common Currency," Papers 611, Stockholm - International Economic Studies.
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  18. Alberto Alesina & Enrico Spolaore & Romain Wacziarg, 1997. "Economic Integration and Political Disintegration," NBER Working Papers 6163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Fidrmuc, J., 1998. "Political support for reforms : economics of voting in transition countries," Discussion Paper 98, Tilburg University, Center for Economic Research. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fidrmuc, J. & Horvath, J., 1998. "Stability of monetary unions : lessons from the break-up of Czechoslovakia," Discussion Paper 74, Tilburg University, Center for Economic Research. [Downloadable!]
    Other versions:
  2. Klaas Staal, 2004. "Country Size and Public Good Provision," Tinbergen Institute Discussion Papers 04-026/1, Tinbergen Institute. [Downloadable!]
  3. Le Breton, Michel & Weber, Shlomo, 2003. "The Art of Making Everybody Happy : How to Prevent a Secession," IDEI Working Papers 164, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  4. K Staal, 2004. "Country size and public good provision," Econometric Society 2004 Australasian Meetings 156, Econometric Society. [Downloadable!]
  5. Essi Eerola & Niku Määttänen & Panu Poutvaara, 2004. "Citizens Should Vote on Secession," Discussion Papers 939, The Research Institute of the Finnish Economy. [Downloadable!]
    Other versions:
  6. Klaas Staal, 2006. "Country size and publicly provided goods," Discussion Papers 187, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
  7. Frank Strobel, 2004. "Monetary integration and inflation preferences: a real options analysis," Money Macro and Finance (MMF) Research Group Conference 2003 95, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  8. Shlomo Weber & Michel Le Breton, 2001. "The Art of Making Everybody Happy: How to Prevent a Secession," IMF Working Papers 01/176, International Monetary Fund. [Downloadable!]
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