Fiscal unions redux
Kehoe, Patrick J.
Pastorino, Elena

Imprint: Universitat Pompeu Fabra 2015
Abstract: Before the advent of sophisticated international financial markets, the 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. This belief prompts a question: 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 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 social 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 across member countries is needed only when individual countries are either unable or unwilling to pursue desirable policies.
Abstract: The ADEMU Working Paper Series is being supported by the European Commission Horizon 2020 European Union funding for Research & Innovation, grant agreement No 649396.
Note: Número d'acord de subvenció EC/H2020/649396
Rights: Aquest document està subjecte a una llicència d'ús Creative Commons. Es permet la reproducció total o parcial, la distribució, la comunicació pública de l'obra i la creació d'obres derivades, fins i tot amb finalitats comercials, sempre i quan es reconegui l'autoria de l'obra original. Creative Commons
Language: Anglès
Series: Barcelona Graduate School of Economics: ADEMU working paper series
Series: Ademu Working Papers Series ; 12
Document: workingPaper
Subject: International transfers ; Optimal currency area ; International financial markets ; Fiscal externalities ; Cross-country externalities

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48 p, 443.2 KB

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Research literature > Working papers

 Record created 2018-10-23, last modified 2020-08-08

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