The Limits to Partial Banking Unions: A Political Economy Approach
American Economic Review, 2018, 108(4-5): 1187-1213
Posted: 24 Apr 2019
Date Written: April 1, 2018
This paper studies the welfare effects of a “partial banking union” in which cross-country transfers for bailouts are set at the supranational level, but policymakers in member countries decide the distribution of funds. This allows the self-interested policymakers to extract rents in the bailout process. In equilibrium, such a banking union can actually lower the welfare of citizens in the country receiving transfers compared to the autarky case, as the receiving country must increase its share of the overall burden of the bailout, in order to compensate for the rent-seeking distortion. Supranational fiscal rules are ineffective at reversing this result.
Keywords: partial banking union, cross-country transfers, bailouts
JEL Classification: D72, E44, E61, G01, G21, G28
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