Working Paper: CEPR ID: DP8552
Authors: Jaime Luque; Massimo Morelli; Jos Tavares
Abstract: Inspired by the current debate over the future of the monetary union in Europe, this paper provides a simple model for the determination of the conditions of survival of the common good, which requires the creation of an effective fiscal union. We highlight the importance of institutional design and varying decision weights for the enlargement of the space for consensus. Our model deepens the discussion of economic risk and political risk in fiscal federalism, and highlights the related roles of country heterogeneity and institutional design in enlarging the scope for cross country fiscal agreements.
Keywords: Autarky; Consensus; Fiscal Union; Heterogeneous Countries; Uncertainty; Voting Weights
JEL Codes: D70; D78; E62; F15; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased economic risk (F69) | preference for autarky (F00) |
| institutional design (D02) | consensus on fiscal union (F36) |
| larger populations (J11) | greater decision-making power in fiscal union (F36) |
| institutional design (D02) | mitigate preferences for autarky (F00) |
| increased economic risk (F69) | likelihood of abandoning common fiscal policies (E62) |