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Fiscal unions redux

Kehoe, P; Pastorino, E; (2017) Fiscal unions redux. Economic Theory , 64 (4) pp. 741-766. 10.1007/s00199-016-1016-x. Green open access

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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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