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

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Author Info
Russell Cooper
Hubert Kempf
Dan Peled

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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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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 05-07.

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Length: 1-32
Date of creation: 2005
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Handle: RePEc:fip:feddwp:05-07

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Keywords: Taxation

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  1. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 533-572, October. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. Canova, Fabio & Pappa, Evi, 2004. "Does it Cost to be Virtuous? The Macroeconomic Effect of Fiscal Constraints," CEPR Discussion Papers 4747, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. 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. [Downloadable!]
  5. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January. [Downloadable!] (restricted)
  6. 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. [Downloadable!]
  7. Carlos E. Zarazaga, 1993. "Hyperinflations and moral hazard in the appropriation of seigniorage," Working Papers 93-26, Federal Reserve Bank of Philadelphia.
  8. Alfredo Cuevas, 2003. "Reforming Intergovernmental Fiscal Relations in Argentina," IMF Working Papers 03/90, International Monetary Fund. [Downloadable!]
  9. V. V. Chari & Patrick J. Kehoe, 1998. "On the need for fiscal constraints in a monetary union," Working Papers 589, Federal Reserve Bank of Minneapolis.
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