Economic Theory Commons^™

Heterogeneous countries may rationally choose to form a currency union first, and a fiscal union later. We find, and illustrate empirically for the EMU countries, reasonable volatility conditions under which this sequencing in the deepening process is indeed rationalizable. 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.

This paper provides a general equilibrium model where jurisdictions offer not only public goods, but also job opportunities. In a context of multiple types of consumers, labor complementarities, and anonymous crowding, heterogeneous populated communities form in equilibrium with an endogenous wage system that is labor-type and jurisdiction-type dependent. Equilibrium jurisdiction structures depend on the relative scarcity of labor types, unlike the situation in Berglas' (1976) partial equilibrium analysis. For a large economy, we prove that equilibrium exists and that the set of equilibria is equivalent to the core.

By introducing repo markets we understand how agents need to borrow issued securities before shorting them: (re)-hypothecation is at the heart of shorting. Non-negative amounts of securities in the box of an agent (amounts borrowed or owned but not lent on) can be sold, and recursive use of securities as collateral allows agents to leverage their positions. A binding box constraint induces a liquidity premium: the repo rate becomes special and the security price higher than expected discounted cash-flows. Existence of equilibrium is granted under limited re-hypothecation, a situation secured by (current or proposed) institutional arrangements.