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Is it is or is it ain't my obligation? Regional debt in a fiscal federation

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  • Russell Cooper
  • Hubert Kempf
  • Dan Peled

Abstract

This paper studies the repayment of regional debt in a multiregion economy with a central authority: Who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bail out the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the U.S., the European Union and Argentina.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0507.

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Date of creation: 2005
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Handle: RePEc:fip:feddwp:05-07

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Keywords: Taxation;

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References

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  1. Fabio Canova & Evi Pappa, 2006. "Does it Cost to be Virtuous? The Macroeconomic Effects of Fiscal Constraints," NBER Chapters, in: NBER International Seminar on Macroeconomics 2004, pages 327-370 National Bureau of Economic Research, Inc.
  2. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
  3. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, vol. 86(2), pages 395-400, May.
  4. Juan Pablo Nicolini & Josefina Posadas & Juan Sanguinetti & Pablo Sanguinetti & Mariano Tommasi, 2002. "Decentralization, Fiscal Discipline in Sub-National Governments and the Bailout Problem: The Case of Argentina," Research Department Publications 3160, Inter-American Development Bank, Research Department.
  5. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 533-572, October.
  6. Russell Cooper & Hubert Kempf, 2002. "Overturning Mundell: fiscal policy in a monetary union," Staff Report 311, Federal Reserve Bank of Minneapolis.
  7. Russell W. Cooper & Hubert Kempf., 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
  8. Carlos E. Zarazaga, 1993. "Hyperinflations and moral hazard in the appropriation of seigniorage," Working Papers 93-26, Federal Reserve Bank of Philadelphia.
  9. Sebastian M. Saiegh & Mariano Tommasi, 1999. "Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 169-209, May.
  10. Alfredo Cuevas, 2003. "Reforming Intergovernmental Fiscal Relations in Argentina," IMF Working Papers 03/90, International Monetary Fund.
  11. Mariano Tommasi & Pablo Sanguinetti, 2003. "Intergovernmental Transfers and Fiscal Behavior: Insurance versus Aggregate Discipline," Working Papers 60, Universidad de San Andres, Departamento de Economia, revised Aug 2003.
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Citations

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Cited by:
  1. Russell Cooper & Hubert Kempf & Dan Peled, 2008. "Regional Debt in Monetary Unions: Is it Inflationary ?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00344475, HAL.
  2. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2010. "Bank Bailouts, International Linkages and Cooperation," Working Papers 1016, Oxford University Centre for Business Taxation.
  3. Russell Cooper, 2012. "Fragile Debt and the Credible Sharing of Strategic Uncertainty," NBER Working Papers 18377, National Bureau of Economic Research, Inc.
  4. Azzimonti, Marina & de Francisco, Eva & Quadrini, Vincenzo, 2012. "Financial Globalization, Inequality, and the Raising of Public Debt," CEPR Discussion Papers 8893, C.E.P.R. Discussion Papers.
  5. Russell Cooper & Hubert Kempf & Dan Peled, 2010. "Insulation Impossible : Fiscal Spillovers in a Monetary Union," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00497430, HAL.
  6. repec:hal:journl:halshs-00344475 is not listed on IDEAS
  7. repec:hal:journl:halshs-00497430 is not listed on IDEAS
  8. Jerome Creel & Etienne Farvaque, 2009. "The political economy of balanced-budget rules," Documents de Travail de l'OFCE 2009-06, Observatoire Francais des Conjonctures Economiques (OFCE).
  9. Thushyanthan Baskaran & Zohal Hessami, 2013. "Monetary Integration, Soft Budget Constraints, and the EMU Sovereign Debt Crises," Working Paper Series of the Department of Economics, University of Konstanz 2013-03, Department of Economics, University of Konstanz.

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