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Fiscal Unions

Author

Listed:
  • Emmanuel Farhi

    (Harvard University)

Abstract

We study cross-country insurance in a currency union with nominal price and wage rigidities. We provide two results that build the case for the creation of a fiscal union within a currency union. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of insurance is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, private insurance is inefficiently low. A role emerges for government intervention in macro insurance to both guarantee its existence and to influence its operation. The efficient insurance arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies.

Suggested Citation

  • Emmanuel Farhi, 2013. "Fiscal Unions," 2013 Meeting Papers 194, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:194
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    References listed on IDEAS

    as
    1. Anton Korinek, 2011. "The New Economics of Prudential Capital Controls: A Research Agenda," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 59(3), pages 523-561, August.
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    7. Sibert, Anne, 1992. "Government finance in a common currency area," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 567-578, December.
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    9. Joshua Aizenman, 1989. "The Competitive Externalities and the Optimal Seignorage," NBER Working Papers 2937, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F15 - International Economics - - Trade - - - Economic Integration
    • F3 - International Economics - - International Finance
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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