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Title: Political economy of fiscal unions
Authors: Fidrmuc, J
Munich, C
Keywords: Fiscal federalism;Risk sharing;Disintegration;Median voter
Issue Date: 2015
Publisher: Elsevier
Citation: European Journal of Political Economy, 40: pp. 147 - 157 (2015)
Abstract: Fiscal unions often use fiscal transfers to counter asymmetric shocks, but such transfers may be politically controversial. I present a model of a two-region fiscal union with region-specific shocks where the threat of secession imposes a limit on fiscal redistribution between regions. I show that both correlation of shocks across regions and their persistence over time are important for political support for integration. The gains from inter-regional risk sharing are potentially large when shocks are negatively correlated and temporary. In contrast, unions with negatively correlated permanent shocks are likely to be fragile.
ISSN: 0176-2680
Appears in Collections:Dept of Economics and Finance Research Papers

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