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Fiscal unions redux

Kehoe, Patrick J. (2017) Fiscal unions redux. CFM discussion paper series (CFM-DP2017-12). Centre For Macroeconomics, London, UK.

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Abstract

Before the advent of sophisticated international Önancial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating Öscal transfers between countries is necessary to provide adequate insurance against country-speciÖc economic áuctuations. A natural question is then: Do sophisticated international Önancial markets obviate the need for such an active union-wide authority? We argue that they do. SpeciÖcally, we show that in a benchmark economy with no international Önancial markets, an activist union-wide authority is necessary to achieve desirable outcomes. With sophisticated Önancial 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 Öscal 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 optimal only when individual countries are either unable or unwilling to pursue desirable policies.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2017 The Authors
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions
F - International Economics > F3 - International Finance > F35 - Foreign Aid
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 12 Dec 2017 10:17
Last Modified: 20 Jul 2019 01:00
URI: http://eprints.lse.ac.uk/id/eprint/86162

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