Fiscal unions redux

Patrick J Kehoe, Elena Pastorino

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)741-776
Number of pages36
JournalEconomic Theory
Volume64
Issue number4
DOIs
StatePublished - Dec 1 2017

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Authority
Fiscal
International financial markets
Insurance
Benchmark
Policy instruments
Monetary union
Economic fluctuations
Fiscal externalities
Fiscal transfers

Keywords

  • Cross-country externalities
  • Cross-country insurance
  • Cross-country transfers
  • Fiscal externalities
  • International financial markets
  • International transfers
  • Optimal currency area

Cite this

Fiscal unions redux. / Kehoe, Patrick J; Pastorino, Elena.

In: Economic Theory, Vol. 64, No. 4, 01.12.2017, p. 741-776.

Research output: Contribution to journalArticle

Kehoe, PJ & Pastorino, E 2017, 'Fiscal unions redux', Economic Theory, vol. 64, no. 4, pp. 741-776. https://doi.org/10.1007/s00199-016-1016-x
Kehoe, Patrick J ; Pastorino, Elena. / Fiscal unions redux. In: Economic Theory. 2017 ; Vol. 64, No. 4. pp. 741-776.
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