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

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  • Cooper, Russell W.
  • Kempf, Hubert
  • Peled, Dan

Abstract

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.

Suggested Citation

  • Cooper, Russell W. & Kempf, Hubert & Peled, Dan, 2005. "Is it is or is it ain't my obligation? Regional debt in a fiscal federation," Working Papers 0507, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddwp:05-07
    Note: Published as: Cooper, Russell, Hubert Kempf and Dan Peled (2008), "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," International Economic Review 49 (4): 1469-1504.
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    References listed on IDEAS

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    1. Jordi Galí & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 533-572, October.
    2. Poterba, James M, 1996. "Budget Institutions and Fiscal Policy in the U.S. States," American Economic Review, American Economic Association, vol. 86(2), pages 395-400, May.
    3. Sanguinetti, Pablo & Tommasi, Mariano, 2004. "Intergovernmental transfers and fiscal behavior insurance versus aggregate discipline," Journal of International Economics, Elsevier, vol. 62(1), pages 149-170, January.
    4. Alfredo Cuevas, 2003. "Reforming Intergovernmental Fiscal Relations in Argentina," IMF Working Papers 03/90, International Monetary Fund.
    5. 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.
    6. Fabio Canova & Evi Pappa, 2006. "Does it Cost to be Virtuous? The Macroeconomic Effects of Fiscal Constraints," NBER Chapters,in: NBER International Seminar on Macroeconomics 2004, pages 327-370 National Bureau of Economic Research, Inc.
    7. 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. 2, pages 169-209, May.
    8. 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.
    9. Jordi Gali & Roberto Perotti, 2003. "Fiscal Policy and Monetary Integration in Europe," NBER Working Papers 9773, National Bureau of Economic Research, Inc.
    10. 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.
    11. 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.
    12. Carlos E. Zarazaga, 1993. "Hyperinflations and moral hazard in the appropriation of seigniorage," Working Papers 93-26, Federal Reserve Bank of Philadelphia.
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    Citations

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    Cited by:

    1. Russell Cooper & Hubert Kempf, 2016. "Deposit insurance and bank liquidation without commitment: Can we sleep well?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 365-392, February.
    2. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2013. "Bank Bailouts, International Linkages, and Cooperation," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 270-305, November.
    3. Cooper, Russell & Kempf, Hubert & Peled, Dan, 2010. "Regional debt in monetary unions: Is it inflationary?," European Economic Review, Elsevier, vol. 54(3), pages 345-358, April.
    4. Todd Keister & Vijay Narasiman, 2016. "Expectations vs. Fundamentals- driven Bank Runs: When Should Bailouts be Permitted?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 89-104, July.
    5. Azzimonti, Marina & de Francisco, Eva & Quadrini, Vincenzo, 2012. "Financial Globalization, Inequality, and the Raising of Public Debt," CEPR Discussion Papers 8893, C.E.P.R. Discussion Papers.
    6. Bignon, V. & Breton, R. & Rojas Breu, M., 2013. "Currency Union with and without Banking Union," Working papers 450, Banque de France.
    7. Cooper, Russell W. & Kempf, Hubert & Peled, Dan, 2009. "Insulation impossible: fiscal spillovers in a monetary union," Globalization and Monetary Policy Institute Working Paper 30, Federal Reserve Bank of Dallas.
    8. E. Mengus, 2014. "International Bailouts: Why Did Banks' Collective Bet Lead Europe to Rescue Greece?," Working papers 502, Banque de France.
    9. Thushyanthan Baskaran & Zohal Hessami, 2017. "Monetary integration, soft budget constraints, and the EMU sovereign debt crises," Economics and Politics, Wiley Blackwell, vol. 29(3), pages 252-275, November.
    10. repec:bla:ecinqu:v:55:y:2017:i:1:p:51-72 is not listed on IDEAS
    11. Russell Cooper, 2012. "Debt Fragility and Bailouts," NBER Working Papers 18377, National Bureau of Economic Research, Inc.
    12. Nadjeschda Katharina Arnold, 2016. "The Sovereign Default Problem in the Eurozone - Why Limited Liability Resulted in Excessive Debt Accumulation and How Insurance Can Counteract," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 66, January.
    13. Guo, Si & Pei, Yun & Xie, Zoe, 2018. "Decentralization and Overborrowing in a Fiscal Federation," FRB Atlanta Working Paper 2018-9, Federal Reserve Bank of Atlanta.
    14. Peter Spahn, 2016. "Central Bank Design in a Non-optimal Currency Union A Lender of Last Resort for Government Debt?," ROME Working Papers 201610, ROME Network.
    15. Calin Arcaelan, 2015. "International Tax Competition and the Deficit Bias," CESifo Working Paper Series 5627, CESifo Group Munich.
    16. Josef Schroth, 2015. "Risk Sharing in the Presence of a Public Good," Staff Working Papers 15-27, Bank of Canada.
    17. Nadjeschda Arnold & Ray Rees, 2015. "The Sovereign Default Problem in the Eurozone: An Insurance-Based Approach," CESifo Working Paper Series 5389, CESifo Group Munich.
    18. Bignon, V. & Breton, R. & Rojas Breu, M., 2013. "Currency Union with and without Banking Union," Working papers 450, Banque de France.
    19. repec:hal:journl:halshs-00344475 is not listed on IDEAS
    20. Russell Cooper & Hubert Kempf, 2013. "Deposit Insurance and Orderly Liquidation without Commitment: Can we Sleep Well?," NBER Working Papers 19132, National Bureau of Economic Research, Inc.
    21. Jerome Creel & Etienne Farvaque, 2009. "The political economy of balanced-budget rules," Documents de Travail de l'OFCE 2009-06, Observatoire Francais des Conjonctures Economiques (OFCE).

    More about this item

    Keywords

    Taxation;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • R5 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis

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