Kehoe, P;
Pastorino, E;
(2017)
Fiscal unions redux.
Economic Theory
, 64
(4)
pp. 741-766.
10.1007/s00199-016-1016-x.
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Abstract
Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated international financial markets, however, such an authority is unnecessary if its only goal is to provide cross-country insurance. Since restricting the set of policy instruments available to member countries does not create a fiscal externality across them, this result holds in a wide variety of settings. Finally, we establish that an activist union-wide authority concerned just with providing insurance to member countries is optimal only when individual countries are either unable or unwilling to pursue desirable policies.
| Type: | Article |
|---|---|
| Title: | Fiscal unions redux |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1007/s00199-016-1016-x |
| Publisher version: | http://doi.org/10.1007/s00199-016-1016-x |
| Language: | English |
| Additional information: | © The Author(s) 2017. This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. |
| Keywords: | Cross-country externalities; Cross-country insurance; Cross-country transfers; Fiscal externalities; International financial markets; International transfers; Optimal currency area |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS |
| URI: | https://discovery.ucl.ac.uk/id/eprint/1538763 |
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