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Stochastic Shocks and Incentives for (Dis)Integration

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Listed author(s):
  • Fidrmuc, Jan

Abstract

I present a political economy model of limits to regional redistribution under the threat of secession. The model depicts a union composed of two regions with centralized fiscal policy. The key feature is the trade off between the benefits of secession embodied by autonomous fiscal policy, and the benefits of integration --- efficiency gains and risk sharing. I argue that previously stable unions may disintegrate in response to specific patterns of region-specific output shocks. The decision on secession depends on correlation and persistence of shocks. Integration is sustainable if the shocks are positively correlated and/or transient. On the other hand, the combination of negative correlation and high persistence of the shocks makes integration fragile. Benefits from risk sharing are greatest when shocks are negatively correlated and transient.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2104.

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Date of creation: Mar 1999
Handle: RePEc:cpr:ceprdp:2104
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Keywords: Central and Eastern Europe; Disintegration; Median Voter; Optimum Currency Areas; Risk Sharing;

Find related papers by JEL classification:

  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • F2 - International Economics - - International Factor Movements and International Business
  • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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  1. Rodrik, Dani, 1999. "Where Did All the Growth Go? External Shocks, Social Conflict, and Growth Collapses," Journal of Economic Growth, Springer, vol. 4(4), pages 385-412, December.
  2. Alberto Alesina & Enrico Spolaore, 1997. "On the Number and Size of Nations," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1027-1056.
  3. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
  4. Jeffrey A. Frankel and Andrew K. Rose., 1996. "Economic Structure and the Decision to Adopt a Common Currency," Center for International and Development Economics Research (CIDER) Working Papers C96-073, University of California at Berkeley.
  5. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2005. "International Unions," American Economic Review, American Economic Association, vol. 95(3), pages 602-615, June.
  6. Enrico Spolaore & Alberto Alesina & Romain Wacziarg, 2000. "Economic Integration and Political Disintegration," American Economic Review, American Economic Association, vol. 90(5), pages 1276-1296, December.
  7. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
  8. Dixit, Avinash & Londregan, John, 1998. "Fiscal federalism and redistributive politics," Journal of Public Economics, Elsevier, vol. 68(2), pages 153-180, May.
  9. Bolton, Patrick & Roland, Gerard & Spolaore, Enrico, 1996. "Economic theories of the break-up and integration of nations," European Economic Review, Elsevier, vol. 40(3-5), pages 697-705, April.
  10. Alesina, Alberto & Perotti, Roberto, 1998. "Economic Risk and Political Risk in Fiscal Unions," Economic Journal, Royal Economic Society, vol. 108(449), pages 989-1008, July.
  11. Xavier Sala-i-Martin, 1992. "Transfers," NBER Working Papers 4186, National Bureau of Economic Research, Inc.
  12. Patrick Bolton & Gérard Roland, 1997. "The Breakup of Nations: A Political Economy Analysis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1057-1090.
  13. Tamim Bayoumi & Barry Eichengreen, 1992. "Shocking Aspects of European Monetary Unification," NBER Working Papers 3949, National Bureau of Economic Research, Inc.
  14. Fidrmuc, J. & Horváth, J., 1998. "Stability of Monetary Unions : Lessons from the Break-Up of Czechoslovakia," Discussion Paper 1998-74, Tilburg University, Center for Economic Research.
  15. Funke, Michael, 1997. "The Nature of Shocks in Europe and in Germany," Economica, London School of Economics and Political Science, vol. 64(255), pages 461-469, August.
  16. Alberto Alesina & Reza Baqir & William Easterly, 1999. "Public Goods and Ethnic Divisions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1243-1284.
  17. Fidrmuc, Jan, 2000. "Political support for reforms: Economics of voting in transition countries," European Economic Review, Elsevier, vol. 44(8), pages 1491-1513, August.
  18. Alberto Alesina & Enrico Spolaore, 1996. "International Conflict, Defense Spending and the Size of Countries," NBER Working Papers 5694, National Bureau of Economic Research, Inc.
  19. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-646, May.
  20. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Redistribution," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 979-1009, October.
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Cited by:

  1. Michel Le Breton & Shlomo Weber, 2003. "The Art of Making Everybody Happy: How to Prevent a Secession," IMF Staff Papers, Palgrave Macmillan, vol. 50(3), pages 1-4.
  2. Fidrmuc, J. & Horváth, J., 1998. "Stability of Monetary Unions : Lessons from the Break-Up of Czechoslovakia," Discussion Paper 1998-74, Tilburg University, Center for Economic Research.
  3. K Staal, 2004. "Country size and public good provision," Econometric Society 2004 Australasian Meetings 156, Econometric Society.
  4. Eerola Essi & Määttänen Niku & Poutvaara Panu, 2004. "Citizens Should Vote on Secession," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-22, October.
  5. Strobel, Frank, 2005. "Monetary integration and inflation preferences: A real options analysis," European Economic Review, Elsevier, vol. 49(4), pages 845-860, May.
  6. Vanschoonbeek, Jakob, 2016. "Regional (In)Stability in Europe: a Quantitative Model of State Fragmentation," MPRA Paper 73976, University Library of Munich, Germany.
  7. Klaas Staal, 2004. "Country Size and Public Good Provision," Tinbergen Institute Discussion Papers 04-026/1, Tinbergen Institute.
  8. Staal, Klaas, 2006. "Country size and publicly provided goods," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 187, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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