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The Limits to Partial Banking Unions: A Political Economy Approach

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  • Dana Foarta

Abstract

This paper studies the welfare effects of a "partial banking union" in which cross-country transfers for bailouts are set at the supranational level, but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers compared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.

Suggested Citation

  • Dana Foarta, 2018. "The Limits to Partial Banking Unions: A Political Economy Approach," American Economic Review, American Economic Association, vol. 108(4-5), pages 1187-1213, April.
    • Handle: RePEc:aea:aecrev:v:108:y:2018:i:4-5:p:1187-1213
    Note: DOI: 10.1257/aer.20141388
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    Citations

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    Cited by:

    1. Facundo Piguillem & Alessandro Riboni, 2021. "Fiscal Rules as Bargaining Chips [Growth in the Shadow of Expropriation]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2439-2478.
    2. Perotti, Enrico & Soons, Oscar, 2019. "The Political Economy of a Diverse Monetary Union," CEPR Discussion Papers 13987, C.E.P.R. Discussion Papers.
    3. Xuan Wang, 2019. "When Do Currency Unions Benefit From Default ?," 2019 Papers pwa938, Job Market Papers.
    4. Segura, Anatoli & Vicente, Sergio, 2018. "Bank resolution and public backstop in an asymmetric banking union," ESRB Working Paper Series 83, European Systemic Risk Board.
    5. Xuan Wang, 2021. "Bankruptcy Codes and Risk Sharing of Currency Unions," Tinbergen Institute Discussion Papers 21-009/IV, Tinbergen Institute.
    6. Dana Foarta, 2021. "How Organizational Capacity Can Improve Electoral Accountability," BAFFI CAREFIN Working Papers 21156, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    7. Marius Clemens & Stefan Gebauer & Tobias König, 2020. "The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme," Discussion Papers of DIW Berlin 1873, DIW Berlin, German Institute for Economic Research.
    8. Körner, Tobias & Papageorgiou, Michael, 2024. "Doom loop, trilemma, and moral hazard: Which narrative of the banking union did stock market investors buy?," Discussion Papers 34/2024, Deutsche Bundesbank.
    9. Dana Foarta, 2021. "How Organizational Capacity Can Improve Electoral Accountability," BAFFI CAREFIN Working Papers 21156, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    10. Haufler, Andreas, 2021. "Regulatory and bailout decisions in a banking union," Journal of Banking & Finance, Elsevier, vol. 133(C).
    11. Henry L. Friedman & Mirko S. Heinle, 2020. "Influence Activities, Coalitions, and Uniform Policies: Implications for the Regulation of Financial Institutions," Management Science, INFORMS, vol. 66(9), pages 4336-4358, September.
    12. Gersbach, Hans & Haller, Hans & Papageorgiou, Stylianos, 2020. "Regulatory competition in banking: Curse or blessing?," Journal of Banking & Finance, Elsevier, vol. 121(C).

    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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