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A Volatility-based Theory of Fiscal Union Formation

Author

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  • José Tavares
  • Jaime Luque
  • Massimo Morelli

Abstract

In a setting where heterogeneous jurisdictions share a common policy, an increase in volatility breaks unanimous support for the status-quo and may prompt a subset of jurisdictions to favor either deepening the agreement through a fiscal union, or revert to autarky. A reassignment of political weights in the .scal union may restore unanimous support for the common policy. We show how the bargaining space depends on relative country income, size, and cross country correlation of shocks. Finally,we discuss the future of a common currency in Europe and the di¤erent emphasismember countries have put on the choice of fiscal federalism versus autarky.

Suggested Citation

  • José Tavares & Jaime Luque & Massimo Morelli, 2012. "A Volatility-based Theory of Fiscal Union Formation," RSCAS Working Papers 2012/21, European University Institute.
    • Handle: RePEc:rsc:rsceui:2012/21
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    Cited by:

    1. Guiso, Luigi & Herrera, Helios & Morelli, Massimo, 2013. "A Culture Based Theory of Fiscal Union Desirability," CAGE Online Working Paper Series 138, Competitive Advantage in the Global Economy (CAGE).
    2. Luque, Jaime & Morelli, Massimo & Tavares, José, 2014. "A volatility-based theory of fiscal union desirability," Journal of Public Economics, Elsevier, vol. 112(C), pages 1-11.
    3. Luigi Guiso & Helios Herrera & Massimo Morelli, 2013. "A Cultural Clash View of the EU Crisis," EIEF Working Papers Series 1321, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2013.

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