Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/79648
Authors: 
Fidrmuc, Jan
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper 4344
Abstract: 
I formulate a political-economy model of a fiscal union where the threat of secession imposes a limit on fiscal redistribution between regions. I argue that the trade-off between implementing the region's preferred fiscal policy and benefiting from inter-regional risk sharing depends on the nature of economic shocks. Specifically both correlation of shocks across regions and their persistence over time are important. 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 prove politically unviable.
Subjects: 
fiscal federalism
risk sharing
disintegration
median voter
optimum currency areas
JEL: 
D72
F59
H77
Document Type: 
Working Paper

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