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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.

Suggested Citation

  • 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. repec:eee:poleco:v:48:y:2017:i:c:p:40-53 is not listed on IDEAS
    2. 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.
    3. 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.
    4. 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.
    5. 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.

    More about this item

    Keywords

    Fiscal federalism; Risk sharing; Disintegration; Median voter;

    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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