Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation

Russell Cooper; Hubert Kempf; Dan Peled

doi:10.3386/w11655

Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation

Russell Cooper, Hubert Kempf, Dan Peled

Department of Economics

Research output: Contribution to journal › Article › peer-review

Abstract

This paper studies the repayment of regional debt in a multi-region economy with a central authority: who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bailout the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the US, the European Union and Argentina.

Original language	English
Journal	National Bureau of Economic Research Working Paper Series
Volume	11655
DOIs	https://doi.org/10.3386/w11655
State	Published - 2005

Bibliographical note

Author contact info: Russell Cooper Department of Economics Villa La Fonte Via delle Fontanelle 18 I-50014 San Domenico di Fiesole (FI) ITALY Europe E-Mail: [email protected] Hubert Kempf Ecole Normale Superieure, Cachan E-Mail: [email protected] Dan Peled Department of Economics University of Haifa Haifa 31905, ISRAEL E-Mail: [email protected]

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title = "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation",

abstract = "This paper studies the repayment of regional debt in a multi-region economy with a central authority: who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bailout the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the US, the European Union and Argentina.",

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N2 - This paper studies the repayment of regional debt in a multi-region economy with a central authority: who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bailout the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the US, the European Union and Argentina.

AB - This paper studies the repayment of regional debt in a multi-region economy with a central authority: who pays the obligation issued by a region? With commitment, a central government will use its taxation power to smooth distortionary taxes across regions. Absent commitment, the central government may be induced to bailout the regional government in order to smooth consumption and distortionary taxes across the regions. We characterize the conditions under which bailouts occur and their welfare implications. The gains to creating a federation are higher when the (government spending) shocks across regions are negatively correlated and volatile. We use these insights to comment on actual fiscal relations in three quite different federations: the US, the European Union and Argentina.

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JO - National Bureau of Economic Research Working Paper Series

JF - National Bureau of Economic Research Working Paper Series

ER -

Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation

Abstract

Bibliographical note

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