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Political economy of fiscal unions

Listed author(s):
  • Fidrmuc, Jan

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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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 40 (2015)
Issue (Month): PA ()
Pages: 147-157

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Handle: RePEc:eee:poleco:v:40:y:2015:i:pa:p:147-157
DOI: 10.1016/j.ejpoleco.2015.09.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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