Incomplete Integration and Contagion of Debt Distress in Economic Unions
This paper compares different fiscal integration schemes on the basis of their ability to finance public investments and resilience to debt distress and contagion. Complete integration schemes, where a central authority chooses the level of public...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2014/12/20464338/incomplete-integration-contagion-debt-distress-economic-unions http://hdl.handle.net/10986/20700 |
| Summary: | This paper compares different fiscal
integration schemes on the basis of their ability to finance
public investments and resilience to debt distress and
contagion. Complete integration schemes, where a central
authority chooses the level of public investments with
productivity-enhancing externalities across different
jurisdictions, are shown to be superior to incomplete
integration schemes, where member governments choose public
investments unilaterally. As a result, equilibrium income is
greater for citizens of member states under a complete
integration scheme. Moreover, complete integration schemes
are shown to be more resilient to idiosyncratic shocks and
more effective in limiting contagion of debt distress. This
is mainly because the central authority can credibly borrow
more without risking default than member states taken
together can and it can "transfer resilience"
across them if needed. These findings inform discussions on
structural aspects of secular stagnation in Europe by
emphasizing a potential challenge in the institutional
design of fiscal responsibilities. |
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