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Stochastic Shocks and Incentives for (Dis)Integration

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  • 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.

Suggested Citation

  • Fidrmuc, Jan, 1999. "Stochastic Shocks and Incentives for (Dis)Integration," CEPR Discussion Papers 2104, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2104
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    References listed on IDEAS

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    Citations

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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. Luque, Jaime & Morelli, Massimo & Tavares, José, 2011. "Fiscal Union Consensus Design under the Risk of Autarky," CEPR Discussion Papers 8552, C.E.P.R. Discussion Papers.
    6. Strobel, Frank, 2005. "Monetary integration and inflation preferences: A real options analysis," European Economic Review, Elsevier, vol. 49(4), pages 845-860, May.
    7. Vanschoonbeek, Jakob, 2016. "Regional (In)Stability in Europe: a Quantitative Model of State Fragmentation," MPRA Paper 73976, University Library of Munich, Germany.
    8. José Tavares, 2012. "Fiscal Union Consensus Design Under The Threat Of Autarky," 2012 Meeting Papers 202, Society for Economic Dynamics.
    9. Klaas Staal, 2004. "Country Size and Public Good Provision," Tinbergen Institute Discussion Papers 04-026/1, Tinbergen Institute.
    10. 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.

    More about this item

    Keywords

    Central and Eastern Europe; Disintegration; Median Voter; Optimum Currency Areas; Risk Sharing;

    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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