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Political Economy of Fiscal Unions

  • Jan Fidrmuc

    ()

I formulate a political-economy model of a fiscal union where the threat of secession imposes a limit on fiscal redistribution between regions. I argue that the trade-off between implementing the region's preferred fiscal policy and benefiting from inter-regional risk sharing depends on the nature of economic shocks. Specifically both correlation of shocks across regions and their persis- tence over time are important. The gains from inter-regional risk sharing are potentially large when shocks are negatively correlated and temporary. In con- trast, unions with negatively correlated permanent shocks are likely to prove politically unviable.

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Paper provided by Centre for Economic Development and Institutions(CEDI), Brunel University in its series CEDI Discussion Paper Series with number 13-06.

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Length: 25 pages
Date of creation: Jul 2013
Date of revision:
Handle: RePEc:edb:cedidp:13-06
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