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A Volatility-based Theory of Fiscal Union Formation

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RSCAS_2012_21.pdf (646.58 KB)
EUI RSCAS 2012/21
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https://hdl.handle.net/1814/21988
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1028-3625
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2012
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Working Paper
Keyword(s)
Fiscal union; Common currency; Autarky; Bargaining space; Voting weights; Heterogeneous countries; D70; D78; E62; F15; H77
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Regulation and economic policy
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EUI RSCAS; 2012/21; Global Governance Programme-17; Global Economics
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LUQUE, Jaime, MORELLI, Massimo, TAVARES, José, A Volatility-based Theory of Fiscal Union Formation, EUI RSCAS, 2012/21, Global Governance Programme-17, Global Economics - https://hdl.handle.net/1814/21988
Abstract
In a setting where heterogeneous jurisdictions share a common policy, an increase in volatility breaks unanimous support for the status-quo and may prompt a subset of jurisdictions to favor either deepening the agreement through a fiscal union, or revert to autarky. A reassignment of political weights in the fiscal union may restore unanimous support for the common policy. We show how the bargaining space depends on relative country income, size, and cross country correlation of shocks. Finally, we discuss the future of a common currency in Europe and the different emphasis member countries have put on the choice of fiscal federalism versus autarky.
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