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 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.

Bibliographic Details

Main Authors:	Karayalcin, Cem, Onder, Harun
Language:	English en_US
Published:	World Bank, Washington, DC 2014-12
Subjects:	ADVANCED ECONOMIES, AMORTIZATION, AMOUNT OF LOAN, ASSETS, BENEFICIARIES, BORROWER, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUSINESS CYCLE, CAPITAL ACCUMULATION, CENTRALIZATION, CLOSED ECONOMY, CONFLICT OF INTEREST, CONNECTIVITY, CONSUMPTION SMOOTHING, CONTINGENT CLAIM, CREDITORS, DEBT, DEBT CONTRACT, DEBT CONTRACTS, DEBT ISSUANCE, DEBT LEVEL, DEBT LEVELS, DEBT OBLIGATIONS, DEBT REPAYMENT, DEBT STOCK, DECISION MAKING, DEFAULT RISK, DEVELOPMENT POLICY, ECONOMIC GROWTH, ECONOMIC INTEGRATION, ECONOMIC OUTLOOK, ECONOMIC RESEARCH, ELASTICITY, EQUILIBRIUM, EXPENDITURES, EXTERNAL DEBT, EXTERNALITIES, EXTERNALITY, FINANCIAL CRISIS, FINANCIAL INSTITUTIONS, FINANCIAL MARKETS, FINANCIAL STABILITY, FISCAL INTEGRATION, FIXED SHARE, FORECASTS, FOREIGN CREDITORS, FOREIGN DEBT, FOREIGN FUNDS, FOREIGN LENDERS, FULL EMPLOYMENT, FULL REPAYMENT, FUNCTIONAL FORMS, FUTURE RESEARCH, GLOBAL ECONOMICS, GLOBAL FINANCIAL MARKETS, GROWTH RATES, HOUSEHOLDS, INCENTIVE CONSTRAINTS, INCOME, INCOME LEVELS, INCOME TAX, INCOMES, INDEBTEDNESS, INEQUALITY, INFRASTRUCTURE INVESTMENT, INFRASTRUCTURE INVESTMENTS, INFRASTRUCTURE PROJECTS, INITIAL DEBT, INTEREST PAYMENT, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INTERNATIONAL BORROWING, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKET, INTERNATIONAL CAPITAL MARKETS, INTERNATIONAL DEBT, INTERNATIONAL ECONOMICS, INTERNATIONAL MARKETS, INVESTING, INVESTMENT BEHAVIOR, INVESTMENT DECISION, INVESTMENT DECISIONS, INVESTMENT POLICIES, INVESTMENT PURPOSES, INVESTMENT STRATEGY, JURISDICTION, JURISDICTIONS, LENDERS, LEVEL OF CREDIT, LEVEL OF DEBT, LEVEL OF INDEBTEDNESS, LEVELS OF DEBT, LEVERAGE, LOAN, LOCAL GOVERNMENTS, MACROECONOMICS, MANDATE, MARKET MECHANISMS, MONETARY FUND, MONETARY POLICY, MORTGAGE, NASH EQUILIBRIUM, NATIONAL INVESTMENT, NEGATIVE SHOCK, NEGATIVE SHOCKS, OPTIMAL INVESTMENT, OPTIMIZATION, ORIGINAL DEBT, OUTPUT, PARTIAL DEFAULT, PAYOFFS, POLITICAL ECONOMY, PRIVATE CAPITAL, PRODUCTION COSTS, PRODUCTION FUNCTION, PRODUCTIVITY, PUBLIC DEBT, PUBLIC FINANCE, PUBLIC GOOD, PUBLIC INVESTMENT, PUBLIC INVESTMENTS, RATE OF RETURN, RECESSION, RENEGOTIATIONS, REPAYMENT, RETURN, RETURN ON INVESTMENTS, RETURNS, RETURNS TO SCALE, SAVINGS, SMALL ECONOMY, SOVEREIGN DEBT, SOVEREIGN DEFAULTS, SOVEREIGN RISK, STRUCTURAL PROBLEMS, SUPPLY SHOCK, SUPPLY SHOCKS, TAX, TAX REVENUES, TOTAL DEBT, TOTAL FACTOR PRODUCTIVITY, TOTAL OUTPUT, TRANSPORTATION INFRASTRUCTURE, TREASURY, UNION, UNIONS, UTILITY FUNCTIONS, WEALTH, WILLINGNESS TO PAY,
Online Access:	http://documents.worldbank.org/curated/en/2014/12/20464338/incomplete-integration-contagion-debt-distress-economic-unions https://hdl.handle.net/10986/20700
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