Fiscal Unions
Name
Werning12-20.pdf
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484.56 KB
Format
Adobe PDF
Checksum (MD5)
f49146aee543d6088c7af3d45cb7d8d6
Author(s)
Farhi, Emmanuel
Werning, Iván
Date Issued
July 31, 2012
Publisher
Cambridge, MA: Department of Economics, Massachusetts Institute of Technology
Series/Report no.
Working Paper, Massachusetts Institute of Technology, Dept. of Economics;12-20
Abstract
We study cross-country insurance in a currency union with nominal price and wage rigidities. We provide two results that build the case for the creation of a fiscal union within a currency union. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of insurance is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, private insurance is inefficiently low. A role emerges for government intervention in macro insurance to both guarantee its existence and to influence its operation. The efficient insurance arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies.
Subjects
Fiscal union
optimal currency area
international insurance
fiscal and monetary policy
monetary union
currency union
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