Working Paper

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 multiregion 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 bail out 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 U.S., the European Union and Argentina.

Keywords: Taxation;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 2005

Number: 0507

Note: Published as: Cooper, Russell, Hubert Kempf and Dan Peled (2008), "Is It Is or Is It Ain't My Obligation? Regional Debt in a Fiscal Federation," International Economic Review 49 (4): 1469-1504.