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A volatility-based theory of fiscal union desirability

Authors
  • Luque, Jaime
  • Morelli, Massimo
  • Tavares, José1, 2, 3, 4, 5, 6
  • 1 University of Wisconsin—Madison
  • 2 Wisconsin School of Business
  • 3 Columbia University
  • 4 NOVA School of Business and Economics
  • 5 Campus de Campolide
  • 6 Center for Economic Policy Research (CEPR)
Type
Published Article
Journal
Journal of Public Economics
Publisher
Elsevier BV
Publication Date
Jan 01, 2014
Accepted Date
Jan 27, 2014
Volume
112
Pages
1–11
Identifiers
DOI: 10.1016/j.jpubeco.2014.01.010
Source
Elsevier
Keywords
License
Unknown

Abstract

•Heterogeneous countries may rationally choose to form a currency union first, and a fiscal union later.•Taking into account the sovereignty loss involved in the formation of a fiscal union, we find reasonable conditions on the determinants of volatility for the currency and then fiscal sequencing in the deepening process of European integration.•Changes in the distribution of expected income shocks require a reassignment of political weights to restore unanimous support for an added fiscal dimension.•The bargaining space depends on countries' relative income, size, and cross correlation of shocks.

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