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Political economy of fiscal unions

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  • Fidrmuc, Jan

Abstract

Fiscal unions often use fiscal transfers to counter asymmetric shocks, but such transfers may be politically controversial. I present a model of a two-region fiscal union with region-specific shocks where the threat of secession imposes a limit on fiscal redistribution between regions. I show that both correlation of shocks across regions and their persistence over time are important for political support for integration. The gains from inter-regional risk sharing are potentially large when shocks are negatively correlated and temporary. In contrast, unions with negatively correlated permanent shocks are likely to be fragile.

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  • Fidrmuc, Jan, 2015. "Political economy of fiscal unions," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 147-157.
  • Handle: RePEc:eee:poleco:v:40:y:2015:i:pa:p:147-157
    DOI: 10.1016/j.ejpoleco.2015.09.002
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    Cited by:

    1. Carsten Hefeker & Michael Neugart, 2015. "Fiscal Transfers in a Monetary Union with Exit Option," Review of International Economics, Wiley Blackwell, vol. 23(3), pages 489-508, August.
    2. Ruxanda Berlinschi & Jan Fidrmuc, 2018. "Comfort and Conformity: A Culture-based Theory of Migration," CESifo Working Paper Series 7294, CESifo.
    3. Lesley-Ann Daniels & Alexander Kuo, 2021. "Brexit and Territorial Preferences: Evidence from Scotland and Northern Ireland," Publius: The Journal of Federalism, Oxford University Press, vol. 51(2), pages 186-211.
    4. Chortareas, Georgios & Mavrodimitrakis, Christos, 2017. "Strategic fiscal policies and leadership in a monetary union," European Journal of Political Economy, Elsevier, vol. 47(C), pages 133-147.
    5. Huang, Shuo & Fidrmuc, Jan & Fidrmuc, Jarko, 2015. "Whither China? Reform and economic integration among Chinese regions," China Economic Review, Elsevier, vol. 33(C), pages 94-110.
    6. Pitsoulis, Athanassios & Schwuchow, Soeren C., 2017. "Holding out for a better deal: Brinkmanship in the Greek bailout negotiations," European Journal of Political Economy, Elsevier, vol. 48(C), pages 40-53.
    7. Balli, Faruk & Pericoli, Filippo M. & Pierucci, Eleonora, 2018. "Globalization and international risk-sharing: The role of social and political integration," European Journal of Political Economy, Elsevier, vol. 55(C), pages 324-345.
    8. Simona Hašková & Marek Vochozka, 2018. "Duality in Cyclical Trends in European Union Confirmed," SAGE Open, , vol. 8(1), pages 21582440177, January.

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    More about this item

    Keywords

    Fiscal federalism; Risk sharing; Disintegration; Median voter;
    All these keywords.

    JEL classification:

    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • F59 - International Economics - - International Relations, National Security, and International Political Economy - - - Other
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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