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Fiscal policy and intranational risk-sharing

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  • von Hagen, Jürgen

Abstract

A general feature of national fiscal systems is that they provide buffers against regional fluctuations in output and employment by redistributing income between the different regions of a country. Recent literature in connection with European monetary integration has stressed the insurance aspect of this function: Through the fiscal system, regions obtain insurance against asymmetric shocks. In this paper, we review the literature on risk-sharing through fiscal mechanisms. While consumption smoothing would call for full risk-sharing among regions, moral hazard problems, political economy problems and considerations of macro economic stabilization reduce the optimal degree of risk sharing. This may explain why empirical research generally finds that intranational risk-sharing based on fiscal policy seems rather modest. --

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Bibliographic Info

Paper provided by ZEI - Center for European Integration Studies, University of Bonn in its series ZEI Working Papers with number B 13-1998.

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Date of creation: 1998
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Handle: RePEc:zbw:zeiwps:b131998

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Cited by:
  1. Amador, Joao L. M., 2000. "Fiscal Federalism in Continuous Time Stochastic Economies," FEUNL Working Paper Series wp383, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Linda Andersson, 2008. "Fiscal Flows and Financial Markets: To What Extent Do They Provide Risk Sharing within Sweden?," Regional Studies, Taylor & Francis Journals, vol. 42(7), pages 1003-1011.
  3. Fidrmuc, Jan & Horvath, Julius & Fidrmuc, Jarko, 1999. "Stability of monetary unions: Lessons from the break-up of Czechoslovakia," ZEI Working Papers B 17-1999, ZEI - Center for European Integration Studies, University of Bonn.
  4. 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.
  5. Focco W. Vijselaar, 2000. "Macroeconomic Policy Co-ordination in the Euro Area," MEB Series (discontinued) 2000-5, Netherlands Central Bank, Monetary and Economic Policy Department.
  6. Büttner, Thiess, 1999. "Regional Stabilization by Fiscal Equalization? Theoretical Considerations and Empirical Evidence from Germany," ZEW Discussion Papers 99-23, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  7. Wagner, Gary A., 2003. "Are state budget stabilization funds only the illusion of savings?: Evidence from stationary panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 213-238.
  8. Andersson, Linda, 2004. "Output Smoothing between Regions in Sweden," UmeÃ¥ Economic Studies 643, Umeå University, Department of Economics.

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