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Is it is or is it ain't my obligation? Regional debt in a fiscal federation

  • Russell Cooper
  • Hubert Kempf
  • Dan Peled

This paper studies the repayment of regional debt in a multiregion economy with a central authority: Who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bail out the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the U.S., the European Union and Argentina.

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File URL: http://dallasfed.org/assets/documents/research/papers/2005/wp0507.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0507.

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Date of creation: 2005
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Handle: RePEc:fip:feddwp:05-07
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  1. Russell Cooper & Hubert Kempf, 2004. "Overturning Mundell: Fiscal Policy in a Monetary Union," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 371-396.
  2. Fabio Canova & Evi Pappa, 2005. "Does it cost to be virtuous? The macroeconomic effects of fiscal constraints," LSE Research Online Documents on Economics 526, London School of Economics and Political Science, LSE Library.
  3. Chari, V.V. & Kehoe, Patrick J., 2007. "On the need for fiscal constraints in a monetary union," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2399-2408, November.
  4. James M. Poterba, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," NBER Working Papers 5449, National Bureau of Economic Research, Inc.
  5. Mariano Tommasi & Pablo Sanguinetti, 2003. "Intergovernmental Transfers and Fiscal Behavior: Insurance versus Aggregate Discipline," Working Papers 60, Universidad de San Andres, Departamento de Economia, revised Aug 2003.
  6. Sebastian M. Saiegh & Mariano Tommasi, 1999. "Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 169-209, May.
  7. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
  8. Jordi GalÌ & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
  9. Alfredo Cuevas, 2003. "Reforming Intergovernmental Fiscal Relations in Argentina," IMF Working Papers 03/90, International Monetary Fund.
  10. Juan Pablo Nicolini & Josefina Posadas & Juan Sanguinetti & Pablo Sanguinetti & Mariano Tommasi, 2002. "Decentralization, Fiscal Discipline in Sub-National Governments and the Bailout Problem: The Case of Argentina," Research Department Publications 3160, Inter-American Development Bank, Research Department.
  11. Carlos E. Zarazaga, 1993. "Hyperinflations and moral hazard in the appropriation of seigniorage," Working Papers 93-26, Federal Reserve Bank of Philadelphia.
  12. Russell W. Cooper & Hubert Kempf., 2001. "Dollarization and the conquest of hyperinflation in divided societies," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-12.
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