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Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union

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  • Timothy J. Goodspeed

Abstract

In this paper we investigate the interplay between national rainy-day funds and supra-national transfers in a fiscal union. We find that moral hazard leads to lower contributions to a rainy day fund with a fiscal union present, and further that the higher the fiscal transfer, the lower will be the contributions to the rainy-day fund. The optimal size of the fiscal union trades-off the ex-post insurance provided by the union and the moral hazard which reduces national ex-ante preparation for stabilization policies. Optimally, the insurance provided by the fiscal union should be lower (1) the more effective is own-fiscal policy; (2) the more the presence of the fiscal union reduces rainy-day fund savings; (3) the lower is the relative probability of recession; and (4) the lower is the utility gain of redistribution in the union. We also find that commitment to a transfer policy is essential. A fiscal union that is prone to break the rules on transfers negatively impacts the ex-ante contributions to individual members' rainy day funds.

Suggested Citation

  • Timothy J. Goodspeed, 2016. "Absorbing Shocks: National Rainy-Day Funds and Cross-Country Transfers in a Fiscal Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(4), pages 407-420, December.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201612)72:4_407:asnrfa_2.0.tx_2-w
    DOI: 10.1628/001522108X14785541073025
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    Cited by:

    1. Timothy J. Goodspeed, 2022. "Coping with extreme events: On solving decentralized budgetary crises," Working Papers. Collection A: Public economics, governance and decentralization 2210, Universidade de Vigo, GEN - Governance and Economics research Network.

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    More about this item

    Keywords

    fiscal union; fiscal transfers; federation; rainy-day fund; fiscal stabilization;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H1 - Public Economics - - Structure and Scope of Government
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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