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A Volatility-Based Theory Of Fiscal Union Desirability, Jaime Luque, Massimo Morelli, José Tavares
A Volatility-Based Theory Of Fiscal Union Desirability, Jaime Luque, Massimo Morelli, José Tavares
Jaime P. Luque
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.